eReport 2023 Spring - ABA Section of Real Property, Trust and Estate Law

UNITED

STATES: IRS GUIDANCE ON IRREVOCABLE TRUSTSWHAT DOES IT MEAN FOR US AND NON-US PERSONS?

TRUST AND ESTATE

3 United States: IRS Guidance On Irrevocable TrustsWhat Does It Mean For US and Non-US Persons?

By: Glenn G. Fox, Elliott H. Murray, Mathieu A. Wiener and Lily Kang

6 Uniform Law Commission RPTE Projects Spring 2023 Update

By: Benjamin Orzeske

8 Using 2023 to Get Ready to Comply with New US FinCEN Beneficial Owner Register

By: Jennie Cherry and Bryan Hoseok Ok

12 FBAR Penalties: Supreme Court Ruling Levels the Playing Field

By: Sean M. Golding

14 United States: Non-willful FBAR Penalty Applies Per Form, Not Per Account

By: Paul F. DePasquale, Lyubomir Georgiev and Tomislav Krmek

16 Snapshot: Succession Law In United Kingdom (England & Wales)

By: Jannika Glendon, Jay Moghal,

REAL PROPERTY

20 Section 467 Leases: Maximizing Tax Benefits while Minimizing Bankruptcy Risks

By: Kris Ferranti and Derek Kershaw

22 Uniform Law Commission RPTE Projects Spring 2023 Update

By: Benjamin Orzeske

24 It’s Time For a New Damages

Calculation: SDNY Bankruptcy Court Applies the Time Approach to Limit Damages in Lease Terminations

By: Eric Waxman, Andrew Greenberg, and Jack Sullivan

26 Subleasing and False Advertising: How Trademark Law Can Help Property Managers

By: Gayle Mercier and Matt Braunel

29 Transfer and Recordation Taxes in the Context of Foreclosure and Deeds-in-Lieu

By: John Farnum and Richard Loube

31 Charged Up: Practical Tips for Developers and Electric Vehicle Charging Station Operators in Negotiating Shopping Center Charging Station Agreements

By: Jonathan N. Zweig

33 In a Case of First Impression, the Wyoming Supreme Court Holds that Life Estate Holders with Executive Rights May Execute Leases that Extend Beyond the Life Estate

By: Ryan Ellard

SECTION ARTICLES AND NEWS

35 Mindfulness: Finding a Bridge to Common Ground in These Polarized Times

By: Gisela M. Munoz

Editor

Robert Steele (TE)

Articles Editor for Real Property

Cheryl Kelly (RP)

Assistant Real Property Editors

John Trott (RP)

Katie Williams (RP)

Sarah Cline (RP)

Articles Editor for Trust and Estate

Ray Prather (TE)

Assistant Trust and Estate Editors

Keri Brown (TE)

Brandon Ross (TE)

Technology/Practice Editor for Trust and Estate

Martin Shenkman (TE)

The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either the American Bar Association or the Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered the rendering of legal or ethical advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are intended for educational and informational purposes only.

© 2023 American Bar Association. All rights reserved.

United States: IRS Guidance On Irrevocable TrustsWhat Does It Mean For US and Non-US Persons?

By: Glenn G. Fox, Elliott H. Murray, Mathieu A. Wiener and Lily Kang1

Baker McKensie reports on IRS Revenue Ruling 2023-2, which states that assets in irrevocable grantor trusts won’t have basis adjustments upon grantor’s death without meeting the criteria for being acquired or passed from a decedent.

In brief

In most cases, a US taxpayer’s capital gains upon the sale of an asset will be calculated by subtracting the basis (usually the cost) of the asset from the sales price.

If a US taxpayer receives an asset as a gift, the asset’s basis remains the same as when it was held by the donor.

However, the basis of an asset that is considered to have been acquired from or to have passed from a decedent will actually be adjusted to its fair market value (FMV) on the date of the decedent’s death.

Making a completed gift to an irrevocable trust while retaining limited powers that would cause the trust to be treated as a grantor trust but not cause the trust assets to be includible in the grantor’s estate is a common US estate tax planning technique.

While the trust receives the assets by way of a gift in the above scenario, for income tax purposes, the grantor is considered to own the assets until death. This causes some practitioners and commentators to argue that the assets in an irrevocable grantor trust should also be eligible for a basis adjustment upon the grantor’s death despite otherwise not meeting the requirements to be considered to have been acquired from or to have passed from a decedent.

The US government indicated its intention to issue guidance on this topic in the past and recently did so by issuing Revenue Ruling 2023-2. It held that the assets in an irrevocable grantor trust do not receive a basis adjustment upon the grantor’s death if the assets do not meet the requirements to be

considered to have been acquired from or to have passed from a decedent and are not otherwise subject to US federal estate tax.

Introduction

The US Internal Revenue Service (IRS) has weighed in on the long-standing debate on what the basis of assets in an irrevocable grantor trust will be upon the grantor’s death.

The question is an important one. For US federal income tax purposes, capital gains are calculated by subtracting the taxpayer’s basis in the capital asset (e.g., the acquisition cost) from the value received upon the sale or exchange of the asset (e.g., the sale price). If an asset is received by way of a lifetime gift, the donee taxpayer’s basis will be same as that of the donor (i.e., a “carry-over basis”). However, for an asset acquired or passing from a decedent, the recipient taxpayer’s basis will be equal to the FMV of the asset on the date of the decedent’s death. There has been debate among tax practitioners as to the basis of the assets of a trust upon the grantor’s death, where a grantor has made an irrevocable, completed gift to the trust but nevertheless retained sufficient powers so that the grantor is treated as the owner of the trust’s assets and income during their lifetime. In such cases, the trust assets would generally not be subject to US federal estate tax upon the grantor’s death (due to having made a completed gift to the trust during life). However, some practitioners and commentators have argued that the trust assets should qualify for a basis adjustment to FMV upon the grantor’s death.

In 2015, the US Department of the Treasury stated its intention to issue “guidance on basis of grantor trust assets at death under [Section 1014 of the Code].” Those plans took a more definite shape when the Department, in its 2022-2023 Priority Guidance Plan, said it would provide “guidance regarding availability of [that section’s] basis adjustment upon the death of the owner of a grantor trust described in [Section] 671 when the trust assets are not included in the owner’s gross estate for estate tax purposes.”

Now, the IRS has opined on this very question.

Background

Section 1014(a) provides that, for property to receive a basis adjustment to its FMV on the date of the decedent’s death, the property must be acquired or passed from a decedent. The Treasury Regulations provide that property acquired from a decedent includes, principally, (1) property acquired by bequest, devise, or inheritance, or by the decedent’s estate, under the decedent’s will or the law governing the descent and distribution of the decedent’s property, and (2) for decedents who die after 31 December 1953, property required to be included in the decedent’s gross estate.

Section 1014(b) clarifies that property is considered to have been acquired from or to have passed from a decedent if it falls within one of seven types of property, including notably (1) property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent, (2) property transferred in trust to pay income for life to or on the order or direction of the decedent with either the power to revoke the trust or the power to change the enjoyment of the trust reserved at all times to the decedent, and (3) property acquired from the decedent by reason of death, form of ownership, or other conditions thereby requiring the property to be included in determining the value of the decedent’s gross estate for US federal estate tax purposes.

While property transferred by completed gift to an irrevocable grantor trust would not meet any of the circumstances qualifying for a basis adjustment at death, this Section does not squarely address the situation where the grantor continues to be treated as the owner of the trust’s assets for US federal income tax purposes until death.

Given that the grantor of an irrevocable grantor trust is the owner of the trust property for US federal income tax purposes and the grantor ceases to be treated as such at the moment of death, the argument follows that the trust could be treated as acquiring the trust property from the grantor-decedent for income tax purposes at death and should be eligible for a basis adjustment.

Summary of Revenue Ruling 2023-2

Revenue Ruling 2023-2 (“Ruling”) describes a US citizen settlor who settled an irrevocable trust and was treated as the owner of the trust for income tax purposes but did not possess any power to cause the trust to be includible in their gross estate. At the time of their passing, the trust asset had appreciated in value with a liability less than its basis. However, the trust property did not meet any of the enumerated criteria for a basis adjustment under Section 1014. The Ruling focused on whether the trust property was acquired by bequest, devise, or inheritance, or whether the trust property was includible in the decedent’s gross estate for US federal estate tax purposes.

The IRS reasoned that the property was not acquired by bequest, devise or inheritance, which is generally understood to be property given or received by will or under the laws of intestacy, because the property was transferred as a completed gift to the irrevocable trust prior to the decedent’s death rather than by will or under the laws of intestacy upon or after death. Since the decedent did not hold a power over the trust that would result in the trust asset being included in the decedent’s gross estate, the trust would not be included in determining the value of the gross estate for US federal estate tax purposes. Thus, the IRS held that the trust property was not eligible for a basis adjustment upon the settlor’s death.

Are assets of grantor trusts still eligible for a basis adjustment?

The Ruling holds that merely being treated as the owner of the trust assets for federal income tax purposes is not sufficient for the assets to be treated as passing from a decedent upon the owner’s death. To qualify for a basis adjustment, property must be considered to have passed (or been acquired) from a decedent.

So, as mentioned above, the Ruling does not preclude the argument that property passing from a non-US citizen who is not domiciled in the US can receive a basis adjustment even where such property would not be subject to US federal estate tax at death, as long as the property is otherwise considered to have been acquired from or to have passed from a decedent. It is notable that the IRS chose to reference a prior Revenue Ruling coming to this very conclusion in support of its position in the Ruling.

What is not explained in the Ruling is what section would determine the basis of assets in an irrevocable grantor trust upon the grantor’s death if not Section 1014, except if the transfer is treated as a gift, in which case the trustee’s basis in the assets would be a carry-over basis. A gift, for income tax purposes, implies that the recipient becomes the taxpayer and pays capital gains tax on a subsequent sale. With a grantor trust, the grantor continues to be treated as the owner of the trust assets for income tax purposes.

Takeaways

• Despite one of the reasons for its conclusion being that the trust assets in question were not subject to estate tax, the Ruling should not stand for the position that estate tax inclusion is required for the basis adjustment.

• Taxpayers with irrevocable, completed gift grantor trusts may need to reevaluate their income tax planning and consider alternative options if the basis adjustment was previously thought to apply.

• The Ruling may not be the last guidance issued by the IRS in relation to basis adjustments for irrevocable grantor trusts.

• Non-US taxpayers seeking to benefit US taxpayers via trusts should continue to seek both estate and income tax advice, including on potential basis adjustment opportunities, even after the Ruling.

Content is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee similar outcomes. For more information, please visit: www. bakermckenzie.com/en/client-resource-disclaimer.

Endnotes

1. Baker McKenzie - Glenn G. Fox , Elliott H. Murray, Mathieu A. Wiener and Lily Kang

Uniform Law Commission RPTE Projects

Spring 2023 Update

By: Benjamin Orzeske, Esq.1

The following Uniform Law Commission projects may be of interest to members of the ABA Section on Real Property, Trust and Estate Law.

Drafting Committees:

Revisions to the Uniform Health-Care Decisions Act. The Uniform Health-Care Decisions Act governs living wills and powers of attorney for health care. It was last updated in 1993. The committee is drafting a revision to better address issues including the determination of capacity; default surrogates (including the priority list of those who can act as surrogate, surrogates for un-befriended patients, and disagreement among surrogates); and eliminating barriers to use and execution (including electronic documents and videorecorded

statements, statutory form language, and oral designations). The committee will also add provisions applicable to mental-health advance directives. The Uniform Law Commissioners will vote whether to approve the final draft act in July 2023.

Tenancy-in-Common Ownership Default Rules. The committee has drafted an act to help alleviate the gridlock that can result from the common-law rule requiring unanimity among cotenants for property management decisions. The committee attempted to balance the protection of individual property rights with the need to make management decisions more efficiently, including the possibility of binding unknown or unlocatable owners when necessary. The act would preserve the cotenants’ right to agree to alternative terms in a cotenancy agreement. The Uniform Law Commissioners will vote on whether to approve the final draft act in July 2023.

Revisions to the Uniform Determination of Death Act. The drafting committee will revise the Uniform Determination of Death Act. This widely adopted act, originally approved in 1980, provides a simple two-prong test to determine when an individual is legally dead. A physician must verify that an individual has sustained either (1) irreversible cessation of circulatory and respiratory functions, or (2) irreversible cessation of all functions of the entire brain, including the brain stem. The second prong that defines brain death needs updating to ensure conformity with recent advances in medical science and evolving standards of practice. The committee will read

its current draft for comment and critique in July 2023 and will meet again over the following year to revise its draft for possible final approval in 2024.

Conflict of Laws in Trusts and Estates. This committee will attempt to clarify and resolve the many conflicts of existing state laws governing trusts and estates. The scope of the project is broad, and will likely address trusts, wills, will substitutes, intestacy, estate administration, fiduciary powers and duties, powers of appointments, powers of attorneys, jurisdictional claims, and statutes of limitations. The drafting committee is collaborating with the American Law Institute reporters who are drafting the Restatement (Third) of Conflict of Laws. The committee’s current draft is available online but will not be read at the ULC 2023 Annual Meeting. The draft will be revised over the coming year and the earliest possible approval of a new uniform act on this topic will be in summer 2025.

Study Committees:

Transfers to Minors Act. This committee is studying the need for and feasibility of updating the Uniform Transfers to Minors Act, last updated in 1986, to address issues including optional extension beyond age 21, successor custodians, minor beneficiaries of qualified retirement accounts, and the relationship between UTMA accounts and other types of investment accounts intended to benefit minors, such as 529 and 529A accounts.

Redaction of Personal Information from Public Records. In 2020, a New Jersey federal judge’s husband and son were shot at their front door by a disgruntled former litigant who targeted the judge’s family by getting her home address from public records. In the wake of this horrific act of violence, states are beginning to pass legislation allowing the redaction of personal information of judges and other public officials from public records. However, there is no consistent approach. A committee on redaction of personal information from public records is studying whether a uniform or model act on the subject is feasible, and the scope of any potential drafting project.

The RPTE Section appoints at least one Advisor to each uniform law commission project involving the law of real property, trusts and estates. All uniform law drafting committees are open to any interested observer and members of the RPTE Section are encouraged to join and contribute their relevant expertise. Visit www.uniformlaws.org to find more information on these committees and on other ULC projects.

Endnotes

1. Ben is Chief Counsel at the Uniform Law Commission. He supervises a staff of legislative attorneys who work to enact uniform laws in all fifty United States, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Ben provides legislative support for the Uniform Commercial Code and for uniform laws in the areas of real property, trusts and estates, investment management, and elder law. He also serves as the ULC’s internal Legal Counsel.

Using 2023 to Get Ready to Comply with New US FinCEN Beneficial Owner Register

By: Jennie Cherry and Bryan Hoseok Ok1

Jennie Cherry and Bryan Hoseok Ok explain that the Corporate Transparency Act established a federal beneficial owner register for US entities. Final regulations were issued by FinCEN on 9/29/2022 and the register is set to begin on 1/1/2024.

Introduction

The Corporate Transparency Act (CTA) was enacted 1 January 2021 announcing the creation of a federal beneficial owner register for entities established under the law of a US state. Proposed regulations were issued 7 December 2021 with details of the type of information to be collected. On 29 September 2022, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) released final regulations and set a 1 January 2024 start date. The register will include details for US companies in a family’s succession planning structure, and advisers should begin in earnest to understand the rules and gather the required details. While an individual may file a report on behalf of a reporting company, the company itself is ultimately responsible for the information provided and the accompanying certification.

Background

The CTA establishes a beneficial owner reporting regime for US

companies, pursuant to which reporting companies must submit a report containing “beneficial owner” and “company applicant” information (together, “beneficial ownership information” (BOI)). FinCEN will oversee implementation and enforcement. The stated goal of the CTA is to combat abuse of anonymous companies, money laundering, terrorist financing and other illicit activities (for further details please see “Reporting beneficial owners of certain US companies – details of new Corporate Transparency Act”).

Final regulations mostly follow proposed regulations

The proposed regulations provided further details and were intended to clarify the various BOI requirements of the CTA, including:

• who must file a BOI report (for further details please see “Reporting beneficial owners of certain US companies –proposed regulations on who must file beneficial owner report”);

• what constitutes beneficial ownership (for further details please see “Reporting beneficial owners of certain US companies – proposed regulations on what constitutes beneficial ownership”);

• what information must be disclosed in a BOI report (for further details please see “Reporting beneficial owners of certain US companies – proposed regulations on what information must be disclosed”); and

• when the information must be reported (for further details please see “Reporting beneficial owners of certain US companies – proposed regulations on when information must be reported and penalties”).

Final regulations provide the blueprint for compliance

The final regulations adopt most of the details laid out in the proposed regulations, but FinCEN did make some important changes.

Generally speaking, FinCEN’s final regulations:

• retain the overall architecture of the proposed regulations and provide some helpful clarifications;

• modify the definition of company applicant and limit initial and updated reporting requirements for company applicants;

• change beneficial owner rules, particularly regarding trusts and 25% ownership rules;

• adjust reporting timeframes, particularly updated reports and corrected reports; and

• include in the preamble useful comments as to how the final regulations will be applied.

The final regulations confirm that all reporting companies must provide FinCEN with information on:

• the reporting company itself;

• each “beneficial owner” of the reporting company; and

• the reporting company’s “company applicant(s).”

The final regulations also made some significant adjustments to the types of information required under the proposed regulations.

Importantly, the final regulations expanded the application of penalties beyond the reporting company alone to include those individuals who have a relationship with such company (ie, an individual or entity who directly or indirectly wilfully provides, or attempts to provide, false or fraudulent information, or who fails to report complete or updated information as required).

Step one: determine whether US entities in family structure are “reporting companies”

Only an entity that meets the definition of a “reporting company” is subject to the requirements of the CTA. Family advisers should be aware that a structure’s US-based holding companies are targeted. The final regulations retain the definition of “reporting companies” to include corporations, limited liability companies (LLCs) or other similar entities that are:

• created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian Tribe (a domestic entity); or

• formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian Tribe (a foreign entity), although not all activities within a state by a foreign entity will require registration.

Thus, reporting companies do not include common law general partnerships, foreign entities not registered to do business in the

United States, unincorporated associations or sole proprietorships, and wealth planning trusts, but do include holding companies that do not qualify for a CTA exemption.

The final regulations make no changes to the 23 categories of entities exempt from the CTA’s BOI reporting requirements. Exempted entities are generally already subject to US regulatory oversight and not regularly found in family succession planning structures. For example:

• certain issuers of securities registered with the Securities and Exchange Commission (SEC);

• certain SEC-registered investment companies and advisors;

• Commodity Exchange Act-registered companies;

• certain pooled investment vehicles;

• certain tax-exempt entities, including charitable 501(c) entities, political organisations, and charitable trusts;

• “large operating companies” with a US presence; and

• companies whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities that themselves qualify for certain of the foregoing exemptions (subsidiary exemption).

The final regulations clarify certain aspects of the exemption for a “large operating company”. This exemption applies to companies that employ more than 20 employees on a full-time basis in the United States, maintain an operating presence at a physical office in the United States and filed a US federal income tax return for the previous year showing more than $5 million in gross receipt or sales from operations in the United States.

Step two: review information to be provided on reporting company itself

Each reporting company in the family structure has a new compliance undertaking necessary to remain in good standing. Fiduciary responsibilities now include learning the details required for a BOI report, reviewing the information in preparation for the initial report and then tracking changes in ownership or officer or board composition and other company events that necessitate an update to the company’s BOI report.

Name and jurisdiction of formation

Each reporting company must provide its full legal name and any alternative names under which it is doing business, as well as the jurisdiction of formation or registration. These details are straightforward. The requirement to also provide the company’s business street address may prove more difficult.

Business street address

The preamble to the final regulations confirms that, as noted in the proposed regulations, the requirement to report the street address of a business is not satisfied by reporting a post office box

or the address of a company formation agent or other third party. FinCEN believes that reporting such third-party addresses creates opportunities to undermine the objectives of the beneficial owner reporting regime. However, this does not take into account holding companies that legitimately require no brick-and-mortar office space. FinCEN has said it will consider providing future guidance or frequently asked questions to address questions regarding principal place of business.

Tax identification number

A reporting company is also required to provide a taxpayer identification number (TIN). However, unlike the proposed regulations, the final regulations provide that reporting companies will not be allowed to report a data universal numbering system number or a legal entity identifier number in lieu of a TIN. Family advisors will need to apply to the Internal Revenue Service for a TIN if the company does not already have one. Foreign reporting companies without a US TIN will be required to provide a foreign tax identification number (for further information on applying for a US TIN, please see “Completing US tax forms: Form SS-4 – Application for Employer Identification Number ”).

Step three: identify company applicant

The final regulations limit the definition of company applicant to only one or two individuals, in comparison with potential multiple persons required to be identified as company applicants under the proposed regulations.

Individuals who file or direct the filing of state establishment documentation

For a domestic reporting company, the company applicant is “the individual who directly files” the document that creates the company. Similarly, for a foreign reporting company, the company applicant is “the individual who directly files” the document that first registers the foreign company. This individual is named in the state formation documents.

For both domestic and foreign reporting companies, “the individual who is primarily responsible for directing or controlling” the filing of the document is also a reportable company applicant, if more than one individual is involved in the filing of the document. Under the expanded application of the penalties, company applicants could be penalised if they cause the failure of a reporting company to complete or update its beneficial ownership information, which is still defined as “any information provided to FinCEN” including company applicant information.

It follows that company applicants will include:

• the attorney primarily responsible for overseeing preparation and filing of incorporation documents and the paralegal who directly files documents with a state office to create the reporting company;

• the individual who will control a reporting company and creates that company by filing its formation documents

without the assistance of a business formation service, law firm, or similar service; and

• service company employees who are personally involved in filing documents to form a company, but not where the business formation service merely provides software, online tools or applicable written guidance.

Step four: determine reporting company’s beneficial owners

The final regulations retain the two-prong definition of “beneficial owner.” A reporting company’s “beneficial owner” is any individual who directly or indirectly, either:

• exercises “substantial control” over the reporting company; or

• owns or controls at least 25% of its “ownership interests”. Substantial control and 25% ownership interest are not defined in the CTA. The final regulations provide guidance to determine whether substantial control or a 25% ownership interest exists.

Know which persons are exempt from being reported as beneficial owners

Details do not have to be provided on a BOI report for the following persons:

• minor children (provided reporting company reports required information of a parent or guardian);

• nominees, intermediaries, custodian or agent;

• employees of a reporting company, acting solely as an employee, provided such a person is not a senior officer;

• an individual whose only interest in a reporting company is a future interest through a right of inheritance; and creditors of the reporting company.

Gather information to be provided for each beneficial owner or company applicant

The following details must be submitted for each beneficial owner and company applicant:

• full legal name;

• date of birth;

• complete address; and

• unique ID number from an acceptable identification document (such as a non-expired passport or driver’s licence).

Consider applying for FinCEN identifier

For individuals who are beneficial owners or company applicants for multiple reporting companies, they may wish to apply for and use a FinCEN identifier instead of providing personal details with

each reporting company submission. This unique identifying number will be assigned by FinCEN after the individual submits an application containing the information about themselves that would be required in a report filed by a reporting company.

The final regulations also permit a reporting company to obtain a FinCEN identifier, but only at or after the time that the entity submits its initial report to FinCEN. However, rather than allow a reporting company to use a FinCEN identifier in the same way as an individual, FinCEN has reserved the ability for further review.

Establish procedures for maintaining compliance across various regimes

Both pre-existing and newly-formed domestic and registered foreign entities are required to file a BOI report, unless otherwise specifically exempt. This is in addition to the increasing diligence required to maintain annual state filings, IRS reporting obligations and paying all related fees and taxes.

Family advisers must remember that the US tax status of an entity is independent of whether that entity is a reporting company for BOI reporting purposes. For example, a single member LLC with a default tax status of “disregarded” may nevertheless be a “reporting company” as defined for CTA purposes (for further details on entity classification, please see “Preparing US tax and information returns: Form 8832, Entity Classification Election”).

Foreign owned single member US LLCs should also review annually whether a Form 5472 must be filed with the IRS to report transactions with the foreign owner or a related party. Eventually, information provided in the BOI report may allow the IRS to follow up on a foreign owned entity’s filing obligations (for further details, please see “Completing US tax forms: Form 5472 – foreign-owned disregarded entities”).

Waiting on BOI report template, certifications and reporting portal

FinCEN is in the process of developing the form of the BOI report and the manner in which it will be filed. FinCEN anticipates most filings will be done electronically and is developing a Beneficial Ownership Secure System (BOSS) to house the gathered information but will still publish copies of the forms. The final regulations do not contain any mechanism to verify accuracy of information reported. But the form will include a certification that reported information is “true, correct, and complete”. FinCEN emphasised that it:

believes that it is reasonable to require reporting companies to certify the accuracy and completeness of their own reports, and it is appropriate to expect that reporting companies will take care to verify the information they receive from their beneficial owners.

While an individual may file a report on behalf of a reporting company, the reporting company is ultimately responsible for the information provided and the accompanying certification.

Deadlines

Due dates provided in the final regulations will reduce some of the compliance burden.

Prior to 1 January 2024

Reporting companies created or registered prior to 1 January 2024 must file an initial BOI report to provide information about the reporting company and its beneficial owners by 1 January 2025.

Reporting companies created or registered prior to 1 January 2024, are not required to report information with respect to any company applicant.

On or after 1 January 2024

Reporting Companies formed on or after 1 January 2024 must file an initial BOI report within 30 days of the earlier of:

• the date on which a reporting company receives actual notice that its creation (or registration) has become effective; or

• the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the reporting company has been created (domestic) or registered (foreign), as the case may be.

Reporting companies formed on or after 1 January 2024 must provide information for both its beneficial owners and its company applicants.

Updated reports for company applicants are not required, but reporting companies are required to correct any inaccurate information previously reported about their company applicants.

Comment

Advisors to families with succession planning structures should take steps now to identify all entities within each structure that were created by filing a document with a US state or that were formed under the law of a foreign country and then registered to do business in the United States. Family members should be educated on disclosure, maintenance of information by FinCEN and confidentiality of BOI reports. Considerations of how the final regulations should be applied to trust companies and trust structures will be addressed in a separate newsletter. Where anonymity and confidentiality are paramount, alternatives should be considered and implemented during 2023.

Endnotes

1. For further information on this topic please contact Jennie Cherry or Bryan Hoseok Ok at Kozusko Harris Duncan’s New York office by telephone (+1 212 980 0010) or email (jcherry@kozlaw.com or bok@ kozlaw.com). Alternatively, contact Severiano E Ortiz at https://www. linkedin.com/in/severianoortiz/ Please note that the authors are unable to provide legal advice to non-clients. The Kozusko Harris Duncan website can be accessed at www.kozlaw.com

Copyright in the original article resides with the named contributor.

FBAR Penalties: Supreme Court Ruling Levels the Playing Field

By: Sean M. Golding1

Golding & Golding’s Sean M. Golding discusses that the Supreme Court limited non-willful FBAR penalties to $10,000 per year; willful and criminal penalties remain.

FBAR Penalties (Update)

2023 will go down in history as a banner year for taxpayers across the globe who have unreported foreign accounts and are facing FBAR penalties. That is because, in February 2023, the Supreme Court issued a ruling limiting civil non-willful FBAR penalties — the most common type of foreign bank account penalty — to a $10,000 per year penalty (the $10,000 adjusts for inflation each year). Prior to this ruling, the IRS seemingly had carte blanche to issue penalties upwards of $10,000 per account per year — typically not to exceed the 50% willfulness threshold. As a result of this new

Supreme Court ruling, even if a taxpayer failed to report millions of dollars in their foreign accounts, as long as they are non-willful, the IRS should be limited to issuing a $10,000 per year penalty if they were found to be non-willful.

Court Ruling is Limited to Civil Non-Willful FBAR Penalties

It is important to take the Court’s ruling in stride, specifically, as to the fact that the IRS still has the power to issue willful penalties, which can reach 50% maximum value of the highest value of the unreported accounts each year. While there is also the potential of criminal FBAR penalties, do not get too overwhelmed by all the nonsense and fearmongering you will undoubtedly find online about going to jail or prison for an FBAR violation. In general, criminal FBAR penalties are rare – and they typically only appear in situations in which other crimes have been committed, such as money laundering, structuring, smurfing, etc. Let’s take a look at what the FBAR penalties may look like in 2023 and beyond.

Non-Willful Civil FBAR Penalties

According to the court’s new ruling, non-willful Civil FBAR penalties are limited to a ‘per form, per year’ penalty. In other words, even if a Taxpayer failed to report several foreign financial accounts in a single year on the FBAR, the penalty is limited to one penalty per year — because it is based on the form being filed and not the number of accounts

Willful Civil FBAR Penalties

The penalties for willful FBAR penalties can be substantial. The IRS has the right to issue penalties upwards of 50% of the maximum aggregate value of unreported foreign accounts per year, for six (6) years. In recent years, the total FBAR penalty for the entire compliance period has generally been limited to a 100% maximum value for the non-compliance period — noting that it previously used to be a 300% maximum, with 300% representing the fact that is a 50% penalty per year and the statute of limitation is for six years.

Willfulness is not the same as ‘Intent’

Taxpayers do not have to have acted intentionally in order to become subject to willful FBAR penalties. That is because there are two lower levels of behavior that qualify as willful: Reckless Disregard and Willful Blindness. Unfortunately, there is no hard and fast rule as to how a person is deemed to have acted with reckless disregard or willful blindness. The IRS’s findings of willfulness are based on the application of a ‘totality of the circumstance’ approach for each taxpayer. Willful FBAR penalties are not impacted by the new ruling.

Criminal FBAR Penalties

Taxpayers can also become subject to criminal penalties if they are deemed to be criminally willful. Like any criminal case, the Taxpayer hast to be found guilty by a jury of his peers and the Government must show the crime was committed ‘beyond a reasonable doubt.’ In general, criminal FBAR liability is rare and limited to situations in which there are various other issues at play, such as hiding offshore money, tax evasion, structuring, etc.

Current Year vs Prior Year Non-Compliance

Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a BoardCertified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Endnotes

1. Golding & Golding, International Tax Lawyers - Sean M. Golding

United States: Nonwillful FBAR Penalty Applies Per Form, Not Per Account

By: Paul F. DePasquale, Lyubomir Georgiev and Tomislav Krmek1

The Baker McKenzie tax team explain how Bittner v. United States clarified the penalty framework for non-willful FBAR cases.

In brief

On 28 February 2023, the US Supreme Court held that the USD 10,000 penalty for nonwillful failure to file an FBAR applies per form, not per account. The Court’s 5-4 decision in Bittner v. United States, 598 US ___ (2023), clarifies the penalty framework for taxpayers who need to regularize their US reporting obligations.

Key takeaway

Taxpayers who are considering regularizing their US tax obligations for non-willful violations through Section 7121 closing agreements should review their submissions and penalty position, except in cases where a closing agreement is already approved by the Secretary and final.

Background

The Bank Secrecy Act (BSA) requires US persons with a financial interest in or signature authority over non-US financial accounts to file an annual report commonly referred to as the “FBAR” (the Report of Foreign Bank and Financial Accounts). US persons satisfy this reporting obligation by e-filing FinCEN Form 114 (prior to 2013, the FBAR was filed on a paper form called Form TD F 90-22.1). Failure to file the FBAR can trigger civil and criminal penalties. The BSA imposes a maximum USD 10,000 penalty for “any violation” of the reporting requirement. The issue in Bittner was whether this penalty applied on a per-account or per-form basis; in other words, what exactly constituted a “violation” for purposes of the non-willful penalty.

Mr. Bittner was a dual-citizen of Romania and the United States, who learned of his BSA reporting obligations in 2011 after returning to the United States from Romania. The government deemed his late-filed reports deficient, and Mr. Bittner filed amended FBARs reporting all non-US financial accounts in which he had a financial interest or over which he had signature authority for 2007 through 2011. Mr. Bittner reported a total of 272 accounts for the five years. The IRS

asserted penalties of USD 2.72 million on a per account basis (USD 10,000 for each of the 272 accounts that Mr. Bittner failed to report from 2007-2011). The question presented to the Supreme Court was whether this was a correct interpretation of the law.

What is a Violation?

Section 5321 of the BSA authorizes the IRS to impose a civil penalty of up to USD 10,000 for “any violation” of section 5314. Section 5314 provides that a violation occurs when an individual fails to file a report consistent with the BSA’s requirements.

The IRS argued that each separate account that was not reported on the FBAR constituted a violation. Accordingly, the IRS calculated the penalty due at USD 2.72 million, on a per-account basis. Mr. Bittner argued that the violation for purposes of the non-willful FBAR penalty was the failure to file the annual report itself. Under his position, the maximum penalty was USD 50,000.

In United States v. Boyd, 991 F.3d 1077, 1079 (9th Cir. 2021), the IRS argued that the non-willful penalty applies on a per account basis. The Ninth Circuit Court of Appeals rejected the IRS position and sided with the taxpayer in holding that the BSA authorizes only one non-willful penalty per form no matter the number of accounts reported on that form. The Fifth Circuit Court of Appeals agreed with the IRS’s position in Bittner, however, and upheld the imposition of the USD 2.72 million penalty calculated on a per account basis. The Supreme Court took the Bittner case to resolve the circuit split.

Non-willful FBAR Penalty applies per form

The Court held that the USD 10,000 non-willful penalty applies per report, not per account. The Court explained that Section 5314 of the BSA does not refer to accounts or their number in specifying what is a violation. It further reasoned that a taxpayer’s legal duty is the duty to file a report and therefore the violation relates to the failure to file the report properly.

The Court compared a situation in which an individual willfully fails to report and may face a maximum penalty of USD 100,000. Furthermore, if there is a willful failure to report the existence of an account or any required identifying information, then the maximum penalty is the greater of USD 100,000 or 50% of the balance in the account at the time of the violation. The Court reasoned that if Congress had intended for the non-willful penalty to apply on a per account basis it would have done so expressly, as it had done in the case of a certain willful penalties.

The Court also referred to IRS fact sheets and form instructions that were inconsistent with the government’s litigating position because they indicated that a failure to file an FBAR may result in a penalty of up to USD 10,000. IRS Forms, Instructions, Publications, FAQs and Fact Sheets are not binding

authority and should not be relied upon by taxpayers. However, Justice Gorsuch, writing for the majority, explained that while non-precedential informal guidance is not binding, a court can consider inconsistency between the government’s current views and past views when weighing the persuasiveness of the current view.

Taxpayer Takeaways

Bittner resolves a significant question regarding the calculation of non-willful penalties under the BSA. The decision generally does not impact penalties for willful compliance failures. The IRS regularly pursues both willful and non-willful FBAR penalties. The standard for willfulness continues to evolve through case law. The IRS and some courts have taken the position that recklessness can give rise to a willful violation even where the taxpayer does not have actual knowledge of an obligation to file. See e.g., Kimble v. United States, 991 F.3d 1238 (Fed Cir. 2021). Bittner also may help to resolve other pending court cases and cases in IRS Appeals and examinations that involve

non-willful FBAR penalties. For each case the resolution will depend on the facts and circumstances as well as the status of the case, for example if there was a court settlement or a signed and agreed IRS Form 866 (Agreement as to Final Determination of Tax Liability) or Form 906 (Closing Agreement on Final Determination Covering Specific Matters).

Taxpayers and tax preparers must exercise due diligence to ensure that taxpayers satisfy applicable reporting obligations and limit exposure to IRS penalties. Taxpayers who have compliance gaps should take steps to regularize their tax reporting immediately. Excessive delays in regularizing tax matters can weaken a taxpayer’s position that failure to comply was non-willful.

Endnotes

1 Baker McKenzie - Paul F. DePasquale, Lyubomir Georgiev and Tomislav Krmek

Snapshot: Succession Law In United Kingdom (England & Wales)

By: Jannika Glendon, Jay Moghal, Nicholas Holland and Simon Gibb1

The McDermott Will & Emery tax group provided an overview of the United Kingdom’s tax system for individuals, focusing on the key factors affecting their tax liabilities and outlining the main taxes they may encounter.

Succession

Estate constitution

What property constitutes an individual’s estate for succession purposes?

Under the law of England and Wales, an individual’s estate for succession purposes comprises all property they own in their sole name. It also includes the deceased’s interest in any property owned jointly with others under a ‘tenancy in common’. With a tenancy in common, each co-owner has a fixed share in the property, succession to which is determined by their will or intestacy rules.

The estate also comprises assets over which the deceased had power to control their use and determine their destination, known as a general power of appointment, together with assets in the estate of an individual who predeceased them to which the deceased is entitled.

For these purposes, a deceased’s estate does not include jointly owned property held under a ‘joint tenancy’ in which the co-owners each own an indivisible share. In these circumstances, on the death of a co-owner, the rule of survivorship applies to vest their interest in the property in the other joint tenants.

Disposition

To what extent do individuals have freedom of disposition over their estate during their lifetime?

Under the law of England and Wales individuals have freedom of disposition over their entire estate during their lifetime. There is no marital property or forced heirship regime to place restrictions on an individual’s freedom of disposition.

In the event of a divorce, the dissolution of a civil partnership or a legal separation, the English court has wide discretion to order the distribution of assets between a couple in order to achieve fairness in accordance with the principles of need, contribution and sharing, which may effectively restrict an individual’s freedom to deal with their assets as they choose. In doing so, following case law in this area, the court will generally give effect to a valid marital property agreement entered into by parties to a marriage provided that, in all the circumstances, it is fair to do so. This is notwithstanding the fact that under the existing law of England and Wales marital property

agreements are not contractually enforceable.

To what extent do individuals have freedom of disposition over their estate on death?

Under the law of England and Wales, individuals have complete freedom of disposition over their estate. There is no system of forced heirship, nor are there any provisions for clawback of lifetime gifts.

The rules relating to jointly owned property will affect an individual’s ability to dispose of such property.

Individuals with specified relationships to a deceased who died domiciled in England and Wales under common law may make a claim under the Inheritance (Provision for Family and Dependents) Act 1975 for financial provision or increased financial provision from their estate if they consider they have not been adequately provided for. However, this does not restrict the individual’s testamentary freedom.

Intestacy

If an individual dies in your jurisdiction without leaving valid instructions for the disposition of the estate, to whom does the estate pass and in what shares?

The rules of succession on intestacy are set out in Part IV of the Administration of Estates Act 1925. In each case, minors inherit at the age of 18 and, until they reach that age, marry or enter into a civil partnership earlier, their share is held on statutory trusts under which the income is either used for their maintenance, education or benefit, or is accumulated.

Intestates leaving a surviving spouse or civil partner

Since 1 October 2014, if an individual dies leaving a surviving spouse or civil partner but no issue (broadly, children or grandchildren, etc), the entire residuary estate passes to the surviving spouse or civil partner.

If the same individual leaves issue, the surviving spouse or civil partner takes the deceased’s personal chattels, a fixed statutory sum of (currently) £270,000 plus interest from the date of death and half of the residuary estate of the deceased absolutely. The issue receives the other half of the estate on statutory trusts. The issue inherits on a per stirpital basis, a grandchild taking only if their parent has predeceased the intestate, for example.

If the same individual died before 1 October 2014, leaving a spouse or civil partner but no issue, and was survived by one or more of their parents, full siblings or issue of such siblings, the spouse or civil partner would have received the personal chattels, a fixed statutory sum of £450,000 and half of the residuary estate absolutely. The other half passed to the parents of the deceased absolutely or in equal shares if one or both

survived. If the parents had died, the other half passed to the full siblings of the deceased.

Intestates leaving no surviving spouse or civil partner

If a deceased leaves children or other issue but no surviving spouse or civil partner, their issue take their residuary estate in equal shares at age 18.

If the same individual leaves no issue but is survived by one or both of their parents, the parents take the residuary estate either alone or in equal shares absolutely.

If the same individual leaves no issue or parent, their residuary estate passes to the following people in order of priority:

• full siblings and, if none, then;

• half siblings and, if none, then;

• grandparents and, if none, then;

• uncles and aunts (being full siblings of a parent of the deceased) and, if none, then;

• uncles and aunts (being half siblings of a parent of the deceased) and, if none, then;

• bona vacantia, to the Crown, the Duchy of Lancaster or the Duchy of Cornwall.

Adopted and illegitimate children

In relation to the disposition of an individual’s estate, are adopted or illegitimate children treated the same as natural legitimate children and, if not, how may they inherit?

Adopted children

Adopted children are treated as the legitimate children of an adopter or adopters and of nobody else. Once they have been adopted, they do not have any rights of inheritance from the estate of their biological parents, other than any to which they became entitled prior to adoption. Before 1 October 2014, only interests to which the child had an unconditional entitlement (‘vested in possession’) would have been preserved. For adoptions made on or after 1 October 2014, an interest of a child in the estate of a deceased biological parent, which is a contingent interest other than one in remainder, will also be preserved. A contingency is a condition that must be fulfilled before the child has an absolute entitlement to the interest. For example, the interest may be contingent on the child attaining the age of 18 years. A contingent interest is in remainder and, therefore, not preserved by the rules introduced in 2014 if it is subject to the interest of another person. An example would

be a gift in a will of a deceased’s estate to a person for life and then to the child at 18 years. The child’s interest is contingent on reaching 18 years but is in remainder to the above person’s life interest and, therefore, not preserved by the new rules.

As a testator has complete testamentary freedom over their estate, no child has a right to inherit from a parent; however, if a will provides for a legacy to children without expressly naming individuals, adopted children would be entitled to inherit in the same way as biological children.

Illegitimate children

No distinction is made between legitimate and illegitimate children. This rule applies to wills and trusts made on or after 4 April 1988 and to the intestacy rules where the intestate died on or after 4 April 1988.

The courts have generally been willing to approve variations that enlarge the class of beneficiaries to include adopted and illegitimate children. The High Court has recently held that trustees could appoint funds on a new trust that defined the class of beneficiaries as including illegitimate and adopted children where a trust was made before the present rules began to apply.

Distribution

What law governs the distribution of an individual’s estate and does this depend on the type of property within it?

In England and Wales, generally succession will be governed by the law of an individual’s domicile in relation to moveable property and the law of the situs of property in relation to immoveable property. Where all factors point to England, English law will apply. Where there is a foreign element English conflicts of laws rules apply and these will incorporate the law of a foreign jurisdiction where an individual died domiciled in that foreign jurisdiction or they owned real estate in a foreign jurisdiction.

Formalities

What formalities are required for an individual to make a valid will in your jurisdiction?

In England and Wales, a will must be made in writing and must be signed by the testator, testatrix or by some other person in their presence and by their direction. This signature must be made or acknowledged by the testator in the presence of two witnesses, who must be present at the same time. Each witness must either sign the will or attest their signature in the presence of the testator or testatrix, but not necessarily in the presence of another witness.

There is no requirement for a will to be dated unless it appoints guardians of a minor. However, if there is doubt regarding the date on which a will was executed, evidence may be required to establish it.

If a beneficiary under the will, or their spouse or civil partner, witnesses the will, the legacy to that beneficiary is void.

Formalities are relaxed for wills for servicepeople on active service. These may be written in a paybook or even made verbally.

The Law Commission issued a consultation on the reform of the law of wills in England and Wales in July 2017, which proposes regulations to permit electronic wills or electronically executed wills. This reform was paused at the request of the government but was in March 2021 confirmed as part of the Law Commission’s agenda for its next programme of reforms. Temporary legislation came into effect on 28 September 2020, permitting wills executed between 31 January 2020 and at least 31 January 2022 to be witnessed virtually, where it is not possible to do so in person. This rule was introduced in recognition of the difficulties presented by social distancing and other rules for executing wills during the covid-19 pandemic.

All or part of a will formally valid under English law may nevertheless become substantively invalid if, for example, it attempts to dispose of assets that the laws of another jurisdiction govern (eg, due to the existence of marital property or forced heirship regimes applicable due to the domicile of the deceased or the situs of immoveable property).

Foreign wills

Are foreign wills recognised in your jurisdiction and how is this achieved?

A will formally valid under the law of another country can be recognised in England and Wales, provided that the will is formally valid and complies with the law of a country in or of which the testator was domiciled, habitually resident or a national either at the time of the execution of the will or at the date of their death, or both.

A grant of probate or grant of representation will usually be required to administer property in England and Wales owned by a deceased person who died domiciled outside the jurisdiction. However, if the deceased was domiciled in a country to which the Colonial Probates Acts 1892 and 1927 apply, and a grant has been issued in that country, an application may be made for the grant to be resealed to administer the estate in England and Wales.

Administration

Who has the right to administer an estate?

The personal representatives (PRs) of the deceased have the right to administer an estate in England and Wales. Where someone has left a valid will appointing PRs, they are called executors, and where the deceased died intestate or failed to appoint executors in his or her will, the PRs are appointed by the court and are called administrators. The court will also appoint administrators if validly appointed executors choose to renounce probate (ie, if they choose not to act as execu-

tors). The persons who are entitled to apply to be appointed as administrators depends on whether the deceased left a valid will but the will did not contain a valid appointment of executors, or whether the deceased died intestate. In the latter case, the entitlement to the grant under the applicable practice rule broadly follows the entitlement to benefit from the estate under the intestacy rules.

How does title to a deceased’s assets pass to the heirs and successors? What are the rules for administration of the estate?

Where the deceased left a valid will, their estate vests in the executors at the date of death. Where a deceased dies intestate, the estate vests in the public trustee until a grant of administration is made by the court, at which point the estate vests in the administrators.

The grant of probate or administration (together a grant of representation) enables the PRs to obtain title to the assets of the deceased and to distribute them to their heirs.

Challenge

Is there a procedure for disappointed heirs and/or beneficiaries to make a claim against an estate?

Under the Inheritance (Provision for Family and Dependants) Act 1975 (Inheritance Act), the following categories of individuals can make a claim for reasonable financial provision from the estate of a deceased person if a will or the applicable intestacy rules do not do so:

• present or former spouses and civil partners (provided they have not entered into a subsequent marriage or civil partnership);

• cohabitees, whether same-sex or opposite-sex, who had lived with the deceased for two years prior to their death;

• a child of the deceased or anyone who was treated by the deceased as a child of a family in which the deceased stood in the role of parent; or

• any other person who was being maintained wholly or partly by the deceased immediately before their death.

Claims under the Inheritance Act can only be made if the deceased was domiciled in England and Wales under common law at the time of death. Such a claim can be made regardless of whether the deceased left a will and must be commenced within six months of the grant of representation being issued.

The measure of an award the court may make depends on the claimant’s relationship to the deceased. Most claimants may only make a claim for provision that is reasonable in all circumstances of the case and is strictly limited to maintenance. Spousal claims are not so restricted.

Alternatively, a person with a potential interest in an estate can bring an action to challenge the validity of the will on the following grounds:

• it was not validly executed;

• the deceased lacked mental capacity at the time of its execution;

• the deceased did not know or approve its contents;

• in making it, the deceased was subject to undue influence; or

• it was forged or there was some other type of fraud involved.

Endnotes

1 McDermott Will & Emery - Jannika Glendon, Jay Moghal , Nicholas Holland and Simon Gibb

Section 467 Leases: Maximizing Tax Benefits while Minimizing Bankruptcy Risks

By: Kris Ferranti and Derek Kershaw1

This article discuss certain benefits and risks for leases that fall under Section 467 of the Internal Revenue Code.

As the economy continues to face challenges and the threat of bankruptcy becomes more prevalent among businesses, landlords must be more vigilant in protecting their interests in commercial leases. One area of particular concern is leases that fall under Section 467 of the Internal Revenue Code (“Section 467 Leases”).

Section 467 Leases can be a great way for landlords to maximize tax benefits. These leases allow landlords to spread out the recognition of income over the term of the lease instead of recognizing it all at once. Tenants may also take advantage of a Section 467 Lease by using it to sway sellers to structure the sale of a property as a ground lease transaction instead. This

can be a cost-efficient way for buyers to finance the purchase and preserve an existing fee mortgage with potentially more favorable debt terms.

When structuring this type of ground lease transaction, the tenant would make a large upfront rent prepayment, being an amount close to the sale proceeds the seller would otherwise receive. The rent payments made throughout the lease term would then be commensurate with the debt service payable under the fee mortgage. As an additional tax benefit, this structure often allows for the buyer/tenant to claim depreciation on the improvements and deduct rent payments for use of the land as a business expense. Overall, the framework of a Section 467 Lease can unlock significant cost savings and help minimize expenses for both parties.

But, while the Section 467 Lease structure can provide significant benefits, it’s important to remember that it comes with potential risks, particularly when a tenant files for bankruptcy. Under the rent allocation framework provided by Section 467 Leases, prepaid rent is essentially treated as a loan to the landlord, which is forgiven over time during the lease term. As a result, in the event of a tenant’s bankruptcy, the framework of these leases can create unintended consequences for landlords, resulting in the landlord being obligated to pay the tenant the unforgiven portion of the so-called “loan” advance the landlord received at the start of the lease.

To qualify as a Section 467 Lease, the lease must go beyond mere language indicating that the allocation of the upfront payment exists only for tax purposes. The lease must have a

“substantive” allocation of rent, meaning the tenant would receive a rebate of the Section 467 Lease loan balance upon a termination unless the tenant is at fault. This means that the lease agreement must not only clearly spell out the amount of upfront rent allocated to each period but also how the landlord generally is entitled to keep the rent allocated to a period only if the tenant uses the property during that period. This is essential in order for the landlord to maximize tax deferral benefits under Section 467.

It’s important to note that, even if the terms of the agreement state that it is a Section 467 Lease, the IRS and the courts are not bound by the labels chosen by the parties. The court will determine whether the advance payments landlords receive are considered prepaid rent or a security deposit based on the rights and obligations of the parties under the lease with respect to the payment, not the payment’s label in the lease. For example, if the lease agreement frontloads payments at the start of the lease but does not specifically indicate the purpose of the advance payments and the framework that will be used to account for said payments, it may not be considered a Section 467 Lease by the IRS.

It’s crucial for landlords to understand the potential consequences of a tenant’s rejection of a Section 467 Lease in the event of the tenant’s bankruptcy. The tax regulations for Section 467 Leases require that the lease provide “unambiguously” the amount of rent allocated to each period and that the allocated amount actually represent the liability of the tenant for using the property in that period. This is important because in the event of a tenant bankruptcy, there is no precedent for analyzing the implications of a bankrupt tenant rejecting a Section 467 Lease. Under the rules of Chapter 11 Bankruptcy, a tenant bound as of the date of filing its bankruptcy petition by an unexpired, nonresidential lease or executory contract, must choose one of three options: to assume the lease and continue to honor all of their obligations under that agreement, assume the lease and assign it to a third party, or reject the lease and vacate the premises. This can have significant consequences for landlords as in the event of a tenant’s rejection of an unexpired lease, the breach is deemed to occur at the time the bankruptcy petition was filed. This results in the landlord developing a general unsecured claim for damages caused by that rejection, which is capped under § 502(b)(6) of the Bankruptcy Code at the unpaid rent for the greater of one year or 15% of the remaining lease term, not to exceed three years

from the earlier of the petition date or the date of surrender or repossession. As a general unsecured creditor, the landlord will share pro rata with other general unsecured creditors, who are subordinate to other classes of claimants.

Thus, when structuring and negotiating a Section 467 Lease, landlords must carefully consider the potential risk of a tenant bankruptcy and how it may impact their rights as a landlord and may even trigger an obligation to repay a portion of the upfront lease payments to the tenant’s bankruptcy estate for the benefit of other creditors if the upfront payment is characterized as a loan to the landlord. This risk should be taken into account when deciding to pursue the tax benefits of a Section 467 Lease, pricing the transaction, and evaluating the creditworthiness of the proposed tenant entity and any guarantors. Additionally, landlords should take a close look at the terms of the lease, to ensure that they are adequately protected in the event of a tenant bankruptcy and should consider whether a security deposit or other forms of credit support are necessary to help mitigate this risk. It is also important for landlords to stay informed about the current economic climate and any changes to bankruptcy laws, as well as understand what state law governs the Section 467 Lease, as these can also have an impact on the risk associated with Section 467 Leases. Ultimately, landlords must take a comprehensive approach when evaluating the potential benefits and risks of a Section 467 Lease, weigh the potential tax benefits against the risk of a tenant bankruptcy, and take appropriate measures to protect their interests.

Endnotes

1. Kris Ferranti is the Team Leader and a Partner in the Real Estate Group at Shearman & Sterling LLP. He has extensive experience representing clients in complex commercial real estate transactions, including in the areas of acquisitions, dispositions, joint ventures, development projects, foreign investment, financings, and ground and space leasing. Kris regularly represents financial institutions, sovereign wealth funds, investment funds, family offices, and individual and institutional investors, developers, and sponsors.

Derek Kershaw is a partner in the Tax practice at Shearman & Sterling LLP. He advises clients on a range of areas of tax law. His practice includes domestic and international transactional work, including mergers and acquisitions, joint ventures, private equity and hedge fund investments and structuring, REITs and other pass-through entities, and real estate.

Uniform Law Commission RPTE Projects

Spring 2023 Update

By: Benjamin Orzeske, Esq.1

Drafting Committees:

Tenancy-in-Common Ownership Default Rules. The committee has drafted an act to help alleviate the gridlock that can result from the common-law rule requiring unanimity among cotenants for property management decisions. The committee attempted to balance the protection of individual property rights with the need to make management decisions more efficiently, including the possibility of binding unknown or unlocatable owners when necessary. The act would preserve

the cotenants’ right to agree to alternative terms in a cotenancy agreement. The Uniform Law Commissioners will vote on whether to approve the final draft act in July 2023.

Restrictive Covenants in Deeds. This drafting committee will draft a new uniform law governing the removal of discriminatory restrictive covenants from recorded property records. Many older deeds contain restrictions based on unconstitutional grounds. Though these discriminatory restrictions are unenforceable, some property owners want the offensive provisions expunged from their chain of title. States have begun to accommodate those requests, but without a consistent process. The American Land Title Association proposed this project to provide a standard process for removal of discriminatory restrictions while preserving the historical record and ensuring the integrity of a property’s title. The Uniform Law Commissioners will vote whether to approve the final draft act in July 2023.

Mortgage Modifications. A drafting committee on mortgage modifications is attempting to draft an act to standardize state laws that govern recording requirements in response to modification of a mortgage agreement. The act will also clarify when a modified mortgage retains its priority over subsequent creditors to secure repayment of the debt. This new act will not be approved before summer 2024.

The following Uniform Law Commission projects may be of interest to members of the ABA Section on Real Property, Trust and Estate Law.

Study Committees:

Redaction of Personal Information from Public Records. In 2020, a New Jersey federal judge’s husband and son were shot at their front door by a disgruntled former litigant who targeted the judge’s family by getting her home address from public records. In the wake of this horrific act of violence, states are beginning to pass legislation allowing the redaction of personal information of judges and other public officials from public records. However, there is no consistent approach. A committee on redaction of personal information from public records is studying whether a uniform or model act on the subject is feasible, and the scope of any potential drafting project.

Revisions to the Model Marketable Title Act. This committee is studying the need for and feasibility of updates to the Model Marketable Title Act. The Model Act, which was derived from Article 3 of the Uniform Simplification of Land Transfers Act, was originally promulgated in 1990 and enacted in one state before being withdrawn as obsolete in 2015. However, about 20 states currently have non-uniform marketable title statutes, with widely varying look-back periods and exceptions. The committee will determine whether a more uniform approach would be beneficial and feasible.

Use of Tokens or Other Similar Products in Real Property

Transactions. This committee is studying the need for and feasibility of a uniform or model act addressing issues related to the use of blockchain-based non-fungible tokens (or other similar products) to modernize and simplify the transfer and financing of real property.

Use of Tenant Information in Rental Decisions. This committee will study the need for and feasibility of a uniform or model law addressing landlords’ use of tenant screening reports in rental decisions. Such reports may give landlords outdated, inaccurate, or incomplete information about prospective tenants’ involvement in prior litigation (e.g., if the report states that the tenant was a party to litigation with a previous landlord but does not disclose that the tenant was the prevailing party). In particular, the committee will focus on identifying how widespread any problems may be and whether any act should be directed primarily at commercial providers of screening reports.

The RPTE Section appoints at least one Advisor to each uniform law commission project involving the law of real property, trusts and estates. All uniform law drafting committees are open to any interested observer and members of the RPTE Section are encouraged to join and contribute their relevant expertise. Visit www.uniformlaws.org to find more information on these committees and on other ULC projects.

Endnotes

1. Ben is Chief Counsel at the Uniform Law Commission. He supervises a staff of legislative attorneys who work to enact uniform laws in all fifty United States, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Ben provides legislative support for the Uniform Commercial Code and for uniform laws in the areas of real property, trusts and estates, investment management, and elder law. He also serves as the ULC’s internal Legal Counsel.

It’s Time For a New Damages Calculation: SDNY Bankruptcy Court Applies the Time Approach to Limit Damages in Lease Terminations

By: Eric Waxman, Andrew Greenberg, and Jack Sullivan1

This article discusses a recent decision out of the U.S. Bankruptcy Court for the Southern District of New York regarding its application of a “time approach” versus a “rent approach” when calculating lease rejection damages in bankruptcy proceedings.

Since 1993, decisions out of the U.S. Bankruptcy Court for the Southern District of New York consistently adopted the aggregate “rent approach” for calculating lease rejection damages in bankruptcy proceedings. But in Bankruptcy Judge Wiles’ recent decision in In re Cortlandt Liquidating LLC, he departed from the “rent approach” in favor of the “time approach,” which is based on the time remaining under the lease rather than factoring in the total or aggregate rent still owed under the lease. The Cortlandt decision is aligned with the trend in the case law and may indicate how lease rejection damage claims will be calculated in Southern District of New York bankruptcy proceedings moving forward.

By way of background, in order to limit the dilution of the general unsecured creditor claim pool by large damage claims resulting from a debtor-tenant’s rejection of an unexpired lease, Congress capped the damages recoverable for lease rejections in bankruptcy cases. The current formulation of that cap is codified in Bankruptcy Code section 502(b)(6): “the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of (i) the date of the filing of the petition; and (ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; . . . .” (emphasis added)

The “one year” component is readily determined -- the rent for the year following the petition date or surrender or repossession of the leasehold. Landlords and tenants dispute the calculation of the “15 percent” component. The rent approach to calculating lease rejection damages, preferred by landlords, imposes a cap on damages determined by a percentage of the rent owed for the entire remainder of the lease term—such percentage is equal to 15 percent of the total dollar amount of rent still owed, so long as that dollar amount is at least equal to the rent reserved for one year and does not exceed the rent reserved for the next three years. The rent approach captures rent escalation amounts arising later in the lease term.

By contrast, the time approach, favored by debtor-tenants and non-landlord general unsecured creditors, calls for a temporal limit equal to the rent reserved under the lease for the next 15 percent of the remaining term, so long as that time period is at least one year and does not exceed three years. The time approach effectively excludes rent escalation amounts arising later in the lease term.

As Judge Wiles notes, the differences between the time approach and the rent approach are irrelevant in cases where it is clear that the section 502(b)(6) cap must be based either on the one-year rent minimum or the three-year rent maximum. However, where the damages fall somewhere in between, the time approach’s calculation will, to the detriment of impacted landlords, not capture periodic rent escalations built into longterm leases.

Despite the Southern District applying the rent approach as recently as 2011, Judge Wiles grounded his decision in the plain meaning of section 502(b)(6). According to Judge Wiles, Congress’ intent to cap damages by reference to time is evident in their use of the words “one year” and “three years” to modify the phrase “of the remaining term of such lease.” Therefore, “15 percent” must be read to further modify the same phrase. Judge Wiles was further persuaded by the fact that other courts and noteworthy bankruptcy treatises have withdrawn support for the rent approach since the SDNY decision in 2011.

Additionally, Judge Wiles was unconvinced by arguments based on principles of equity and fairness, explaining that perceptions of equity and fairness will change depending on perspective—landlords may find the time approach unfair or inequitable, while other unsecured creditors would likely take the opposite view. In Judge Wiles’ view, the fact that there is a cap on lease rejection damages in the first place shows that Congress intended to limit landlords’ claims and “Congress plainly sought to strike a balance between the interests of landlords and other creditors, whose claims might be diluted if landlords were allowed to assert very large lease termination claims.”

Much to landlords’ dismay—especially in a year that brings with it a degree of financial stress—application of the time approach could result in landlords recovering a smaller sum than they would under the rent approach. However, judges presiding over future bankruptcy cases in the Southern District of New York will not be bound by Judge Wiles’ adoption of the time approach and therefore it remains to be seen whether future decisions will follow Judge Wiles’ lead or revert to the previously used rent approach.

Landlords may be assuaged somewhat by Judge Wiles’ additional determination that certain tenant obligations that arise independent of the termination of the lease, such as repair obligations and mechanic’s lien claims, are not subjected to the capped breach damages provision.

Endnotes

1. Eric Waxman is a counsel in Cadwalader’s Financial Restructuring Group, focusing on representation of creditors and financial institutions in all aspects of bankruptcy and insolvency proceedings and out-of-court workouts. He also advises clients concerning insolvency risks and transaction structuring, including derivative and qualified financial contract transactions, the application of safe harbor protections, and the use and enforcement of rights under letters of credit.

Andrew Greenberg is an associate in Cadwalader, Wickersham & Taft LLP’s Financial Restructuring Department in New York. Andrew advises financial institutions and other corporate clients on a variety of bankruptcy and insolvency-related issues and advises lenders in connection with the origination and securitization of complex bankruptcy-remote commercial mortgage loans.

Jack Sullivan is an associate in Cadwalader, Wickersham & Taft LLP’s Real Estate Finance Department in New York. Jack represents global investment banks and other financial institutions in connection with the origination of mortgage loans secured by commercial office buildings, retail properties and student housing, including multi-state, multi-property pooled transactions. Jack also has experience in the origination of mezzanine loans, as well as the sale of mortgage and mezzanine loans.

Subleasing and False Advertising: How Trademark Law Can Help Property Managers

By: Gayle Mercier and Matt Braunel1

This article highlights how trademark law may afford a landlord a vehicle to halt short term rental advertising when subleasing is prohibited by a lease.

Imagine owning a building in which you are renting out living space at your set prices and then coming across an advertisement that those same living spaces are available for a nightly, weekly, monthly or even annual fee. The scenario is actually playing out right now for many landlords.

There has been an explosion of online marketplaces listing homes, condos, apartments, rooms and even garages for rent as alternatives to hotels. Many of these listings are posted by individuals (who we will refer to in this hypothetical as “ABBers”) who are renting out their spaces, otherwise referred to as subleasing. Some ABBers have even created sophisticated business models around the online sublease marketplace – forming lim -

ited liability companies to engage with subleasers, hiring professional photographers and marketers and even using SEO or search engine optimization to ensure their listing ranks high on customers’ searches. However, quite often, the ABBer has a lease that prohibits such subleases.

What are the legal remedies that they can take to prevent and stop the practice? First, property managers can invoke the breach of the sublease prohibition to begin eviction proceedings. But, ABBers who are profiting from this model can be motivated to resist.

In this scenario, property managers can look to trademark law for a solution. Believe it or not, trademark law – specifically false advertising - has relevance here.

The Lanham Act, signed into law in 1946 by then-President Harry S. Truman, governs federal trademark law in the United States. The Act provides the foundation for federal registration of trademarks, civil remedies for infringement and trademark counterfeiting. In addition, the Act prohibits false advertising. While many Lanham Act cases involve competitors using confusingly similar names or trademarks or making claims about a competitor’s product, the Lanham Act specifically prohibits misrepresentations about a person’s own goods, services or commercial activities when made in commercial advertising or promotion (15 U.S.C. 1125(a)(1)(B) ). The Lanham Act has provisions that allow for monetary awards to aggrieved businesses, but also emphasizes the need to protect consumers from confusion or harm and is frequently used as a basis for issuing temporary, preliminary and permanent injunctions prohibiting certain conduct (15 U.S.C. 1116, 1117).

In this hypothetical, the ABBer makes an implicit misrepresentation about his or her own services or commercial activities when listing what they are promoting as their property in the online marketplace. Consumers may perceive that the ABBer has the authority to sublease the property when that authority has been reserved to the property manager because the ABBer does not own the property. The Lanham Act expressly prohibits the misrepresentation about the ABBer’s own services or commercial activities. The regional circuits have developed their own specific tests for determining liability, but most Courts require the Plaintiff to show: (1) a literal or implicit false or misleading statement; (2) actual deception or that deception or confusion is likely; (3) the deception materially influences the

buyer’s purchase decision; (4) the false statements were made in interstate commerce; and (5) some injury to the plaintiff.

The Property Manager can seek an injunction prohibiting the continued false advertising that would stop the ABBers’ ongoing advertising, impacting the ABBers’ business model. Eviction proceedings as a result of the ABBer violating his or her own lease can be simultaneously pursued as well.

Endnotes

1. Gayle Mercier is the Co-Chair of Thompson Coburn’s Real Estate practice group. Matt Braunel is a partner in Thompson Coburn’s Intellectual Property group.

Transfer and Recordation Taxes in the Context of Foreclosure and Deeds-in-Lieu

By: John Farnum and Richard Loube1

This article discusses recordation and transfer tax implications lenders should consider in the context of foreclosures and deeds-in-lieu, using the Washington, D.C. metro area as a case study.

Whether due to hybrid working models leaving office buildings largely vacant, or perhaps other lingering effects of the COVID-19 pandemic, there has been a recent rise in distressed real property assets in major metropolitan markets. This has led to an increase in workouts, deeds-in-lieu of foreclosure (“DILs”), and, in some cases, foreclosure. Where borrowers have defaulted on their loans secured by these assets, lenders are often then in a position of marketing the distressed asset to investors that may be looking to acquire distressed real property, and, one way that lenders are trying to make the investment more attractive is by structuring to minimize transfer and recordation taxes, particularly in the District of Columbia metropolitan market (including D.C., Maryland and Virginia, known colloquially as the “DMV”).

It is well known that transfer and recordation taxes are a considerable transactional cost in the DMV market, especially in the District of Columbia where the combined rate of transfer and recordation taxes is 5% for Class 2 commercial real property. These current rates from D.C. Mayor Bowser’s Budget for

Fiscal Year 2020 are set to sunset on September 30, 2023, but that should be monitored in the event these rates are extended as a part of D.C.’s next budget. In Maryland, the statewide State transfer tax rates is 0.5%, and there is also the County transfer tax and State recordation tax, which rates are set by each County. For example, in Prince George’s County, the County transfer tax is 1.40% of the amount of consideration, and the State recordation tax is $2.75 for every $500 of consideration. In Virginia, there is less attention to transfer and recordation taxes – often referred to as grantor and grantee taxes in Virginia – since the rates are lower, but there is still an opportunity for structuring to try to minimize these costs. Statewide, the Virginia State grantor tax is $0.50 for every $500 of consideration, the State recordation tax is $0.25 for every $100 of consideration, and the Local recordation tax is 1/3 of the State recordation tax (or approximately $0.083 for every $100 of consideration).

In each jurisdiction, in determining the amount of transfer and recordation taxes due, whether in connection with a DIL or foreclosure, the local recording office must determine the actual consideration payable for the transfer. In foreclosure sales, this is generally more straightforward, as the local recording offices will tax the amount of the winning bid. With that said, in the District of Columbia, if the Recorder of Deeds (ROD) determines that the actual consideration is “nominal,” then ROD can assess transfer and recordation taxes based on the fair market value – i.e., “100% of the most probable price at which a particular piece of real property… would be expected to transfer…” – of the property instead of the actual consideration.2 Nominal consideration is defined as bearing “no reasonable resemblance to the fair market value of the property,” and, if the actual consideration is less than 30% of the fair market value of the property, then the actual consideration is deemed to bear no resemblance.3 In Virginia, local recording offices also have statutory authority to impose tax on an amount other than the stated consideration where a recording clerk determines that the “actual value of the property conveyed” is greater than the stated consideration.4

Even where lenders are the successful bidder at foreclosure, whether by way of credit bid or otherwise, transfer and recordation taxes generally apply. That being the case, lenders will often try to “flip” the bid to a third-party purchaser to take title to the property out of the foreclosure. However, careful consideration should be given to structuring these types of transactions, as it can be treated as two conveyances and, therefore, subject to double taxation.

For DILs, the analysis can be more involved in determining the actual consideration for a transfer. For instance, in Maryland, the taxable consideration may be the greater of (i) the amount of the indebtedness forgiven and (ii) the fair market value of the real property which typically means the assessed value of the real property as last determined by the State Department of Assessments and Taxation, unless an appraisal is obtained. However, if the mortgage or deed of trust is nonrecourse, then

the taxable consideration may be the lesser of (i) the amount of indebtedness forgiven and (ii) the fair market value of the real property.

For transfer and recordation taxes in the context of foreclosure and DILs, much of the guidance comes from, not case law or statute, but opinions by attorney generals and tax commissioners, and in Maryland and Virginia, some counties can even follow their own specific practice. As an example, in the context of foreclosure, Montgomery County’s Department of Finance has, at least in the past, taken the position that the transfer taxes should be based on the amount of the winning bid plus the amount of debt forgiven.

While the above discussion focuses on mortgage lenders, these considerations may be relevant to mezzanine lenders as well, as both the District of Columbia and Maryland have a controlling interest transfer tax (“CITT”) that applies to certain transfers of direct and indirect ownership interests in real-property-owning entities. In the District of Columbia, the CITT – referred to as the “economic interest transfer tax” – applies to a transfer (or series of transfers within a 12-month period) of 50% or more of direct or indirect interests in an entity that, in the previous 12 months, either (1) derives 50% of its gross receipts from the ownership of disposition of D.C. real property, or (2) holds D.C. real property that has a value comprising 80% or more of the value of the entity’s assets.5 In Maryland, the CITT applies to the transfer (or series of transfers within a 12-month period) of 80% or more of direct or indirect interests in a “real property entity,” which is generally defined as an entity that owns Maryland real property that (1) constitutes at least 80% of the value of the entity’s assets and (2) has an aggregate value of at least $1,000,000.6 Thus, an assignment or UCC foreclosure of ownership interests in a real-property-owning entity may be subject to tax as well.

As an aside, unlike Maryland and the District of Columbia, Virginia does not have a CITT. However, Virginia does have less defined authority to impose taxes on certain transfers that are made for the purpose of avoiding transfer taxes.7 For instance, transfer taxes do not apply to a deed transfer when the transfer is made from a parent to a subsidiary where the parent is entitled to receive not less than 50% of the profits and losses of the subsidiary. Thus, the parent could own the subsidiary 50/50 with another party as co-owners and the deed transfer would be exempt from transfer taxes. If, however, the parent then subsequently transfers 50% of the ownership in the subsidiary to the co-owner, resulting in the other party becoming a sole owner of the subsidiary, it may be determined that the transfers were structured to avoid tax that would otherwise be due and payable if the property was transferred directly by deed from the parent to the co-owner. In such a case, taxes would be due on the transfer as if it was effected by deed.

When advising mortgage and mezzanine lenders on foreclosure and DILs, attention should be given to transfer and recordation taxes as a part of the analysis (particularly in the DMV

market), as there may be opportunity to make the acquisition of a distressed real property asset a more attractive investment, or to otherwise mitigate losses.

Disclaimer: This is for general information and is not intended to be and should not be taken as legal advice for any particular matter. It is not intended to and does not create any attorney-client relationship. The opinions expressed and any legal positions asserted in the article are those of the author and do not necessarily reflect the opinions or positions of Miles & Stockbridge, its other lawyers, or the ABA.

Endnotes

1 John Farnum is a principal at Miles & Stockbridge, P.C., where his practice focuses commercial and real estate litigation, including, bankruptcy and creditors’ rights, administrative appeals, and zoning, real estate, and business disputes. As a part of his practice, he often advises trustees, receivers, and lenders and other creditors in all phases of business restructurings, foreclosures, receiverships and out-of-court workouts, and has substantial experience representing clients on issues arising from bankruptcy proceedings, including adversary proceedings, preference actions, fraudulent transfer actions and lift-stay motions. Richard Loube is an associate at Miles & Stockbridge, P.C., where his practice focuses on both equity and debt transactions, including mortgage and mezzanine finance for commercial, mixed-use and multifamily residential projects. He also advises clients on various aspects of commercial real estate and finance related to real estate development, including acquisitions and dispositions; commercial leasing for retail, office, industrial and solar; construction; and title matters, such as recorded covenants and easements and title defects.

2. D.C. Code Ann. § 47-802(4); D.C. Mun. Regs. tit. 9, § 502.3.

3 D.C. Mun. Regs. tit. 9, § 502.6.

4. Va. Code Ann. § 58.1-801.

5. D.C. Code Ann. § 42-1102.02.

6. Md. Code Ann., Tax-Prop. § 12-117.

7. Va. Code Ann. § 58.1-811.

Charged Up: Practical Tips for Developers and Electric Vehicle Charging Station Operators in Negotiating Shopping Center Charging Station Agreements

By: Jonathan N. Zweig1

This article provides practical tips for developers and electric vehicle charging station operators to consider in negotiating shopping center charging station agreements.

The electric vehicle (EV) market in the United States continues to break records. In 2021, there were an estimated 607,600 EV sales, an approximate 83% increase from 2018. In 2022, EV sales constituted almost 6% of all vehicles sold. These trends are anticipated to accelerate, as federal and some state governments are creating incentives for the continued production and consumer purchase of EVs. Given the anticipated surge in EV accessibility and sales, demand for EV charging stations is expected to experience an accompanying increase.

Parking lots of shopping centers and other commercial projects can be an ideal location for EV charging stations, as there is an inherent, synergistic connection for EV drivers to conveniently charge their EV while the developer and retail operators benefit from the

drivers’ patronage of the shopping center. Additionally, the mere presence of charging stations can be used as an amenity to attract customers to a particular property while simultaneously providing the EV charging station operator (“operator”) with a built-in customer base.

Shopping center EV charging stations present new legal issues that differ in many critical ways from the legal issues that typically arise in shopping center retail matters. As the proliferation of EV charging stations in shopping centers continues, owners/developers of shopping centers and retail projects (“developers”) and operators need to understand the unique legal issues involved in the installation and presence of charging stations, and structure charging station lease or license agreements (“agreements”) to protect each party from the various complications that may arise. This article analyzes some of the threshold concerns and objectives of each party and presents a few tips to developers and operators in structuring and negotiating these agreements.

Matters of Record & Existing Tenant Leases

One of the key legal considerations for developers in determining whether charging stations can be installed at their projects is analyzing any matters of record (CC&Rs, reciprocal easement agreements, etc.) and existing tenant leases, as they may restrict or limit the installation of charging stations. For instance, a retail tenant lease may include a so-called “control area” or “no-build zone” where the developer-landlord is prohibited from installing (or leasing to a party who will install) improvements in a particular area of the parking lot. Alternatively, major tenant leases may include an area of the parking lot where charging stations can be installed or a limit on the number of parking spaces that can be converted to charging stations.

In addition, matters of record and existing tenant leases may include requirements that all parking spaces in the shopping center be provided on a “non-exclusive” basis. If parking spaces are converted to charging stations, an existing tenant could claim that the parking spaces now being utilized for EV charging are no longer available to the tenants and invitees of the property on a non-exclusive basis. A successful claim by a tenant that the charging station is prohibited by the terms of its lease could be detrimental to both the developer and operator. As such, a savvy developer should include a concept in the agreement to make clear that the charging station must remain available at all times on a non-exclusive basis for use by all of the customers and invitees of the tenants of the property. Relatedly, developers may consider updating their form leases to include a tenant acknowledgement that the developer can convert any parking spaces to charging stations.

Ultimately, since developers are bound by the terms of the matters of record and existing tenant leases, developers may want to obtain any consents or approvals required under those documents before entering into a formal agreement with an operator. However, since it is not always practical to obtain these approvals in advance, the parties could consider agreeing to a post-execution period for the developer to obtain required consents and approvals. Operators tend to be amenable to this arrangement, as they understand these approvals may be required for the operator to use the charging station for its intended purpose. This enables the operator to avoid the undesirable scenario where they build but then cannot operate a charging station.

Due Diligence Considerations

The State of California has enacted legislation designed to preempt the authority of any city or municipality to delay or deny charging station projects by imposing a clear duty to ministerially approve charging facilities. In particular, Gov. Code Section 65850.7(b) mandates that “[a] city…shall administratively approve an application to install [EV] charging stations through the issuance of a building permit or similar nondiscretionary permit” and clarifies that the city’s review is “limited to those standards and regulations necessary to ensure that the [EV] charging station will not have a specific, adverse impact upon the public health or safety.” Howev-

er, other states may not have established such specific guidelines regarding charging station permits. Even in California, some municipalities have conditioned or delayed issuing building permits or similar nondiscretionary permits to operators by imposing various development standards unrelated to public health or safety. Accordingly, since expeditious receipt of permits is not guaranteed, a shrewd operator will not commit to building the charging station and paying rent until it knows it can receive the necessary permits. One solution is to incorporate a “due diligence period” or “permit contingency” into the agreement, where the operator receives a predetermined amount of time to pursue the necessary permits or terminate the agreement. Some developers may not be keen on providing this termination right, as there is an opportunity cost associated with entering into and then terminating an agreement with the operator. However, if the developer has a post-execution period to obtain approvals required under the matters of record and existing leases, then most developers and operators will agree that it is mutually beneficial for each party to have some post-execution period to obtain their respective approvals.

Government Incentives

As mentioned above, the government is incentivizing the installation of EV charging stations by providing various credits, rebates, benefits and other consideration. An astute operator will want to derive the benefit of these incentives and will use the agreement with the developer to clarify that, as between the parties, the developer does not have any ownership in the charging station and its facilities, and is not entitled to receive any incentives from the construction, ownership, use or operation of the charging station. Most developers will not object to the operator being entitled to the incentives earmarked for the operator. However, since EV charging station development is a relatively new area where new government incentives can be created at any time, developers may want to attempt to retain ownership of any incentives attributable to or given in connection with a property owner entering into an agreement with an operator to provide charging stations at a commercial property. As the world of government incentives and charging stations evolves in unpredictable ways, the charging station agreement is the optimal legal document to set forth the parties’ agreement as to incentives.

As is evident from the items discussed above, a charging station lease or license agreement between a developer and an operator is different in many material ways than a retail lease in a shopping center. Since charging stations are likely to become ubiquitous in shopping centers, it is critical that developers and operators understand the complexities and nuances involved in negotiating these agreements, which will help ensure a smooth and successful business relationship.

Endnote

1. Jonathan N. Zweig is an associate in the Los Angeles office of Cox, Castle & Nicholson LLP. Mr. Zweig’s practice focuses on retail development and commercial leasing.

In a Case of First Impression, the Wyoming Supreme Court Holds that Life Estate Holders with Executive Rights May Execute Leases that Extend Beyond the Life Estate

By: Ryan Ellard1

Life goes on: This case note highlights a recent decision finding a lease with a term longer than the life of the original landlord/life estate holder runs with and binds the property.

On October 26, 2022, the Wyoming Supreme Court issued an amended opinion clarifying, and arguably vastly expanding, the rights of life estate holders in the context of leaseholds. North Silo Resources, L.L.C. v. Deselms, 2022 WY 116A, 518 P.3d 1074 (Wyo. 2022), stems from a complicated web of contracts for deed, warranty deeds, and quitclaim deeds dating back to 1987 for a property located in Laramie County, Wyoming (the “Property”).2 At the heart of the dispute was a lease to extract mineral resources from the Property. The novel issue of law presented to the Court was whether the Lessors, who held a life estate in the Property’s minerals and reserved executive rights, may enter into leases with terms extending beyond the expiration of their life estate.

The Supreme Court began its analysis by acknowledging that other courts around the country have determined that reserved executive rights can empower a life estate holder to execute leases beyond the life estate term. Id. at 1087 (citing RLM Petroleum Corp. v. Emmerich, 896 P.2d 531, 535 (Okla. 1995); Steger v. Muenster Drilling Co., 134 S.W.3d 359, 373 (Tex. Ct. App. – Fort Worth 2003, review denied); Glass v. Skelly Oil Co., 469 S.W.2d 237, 240–41 (Tex. Ct. App. – El Paso 1971, writ ref’d n.r.e.); Amarillo Oil Co. v. McBride, 67 S.W.2d 1098, 1100–01 (Tex. Comm’n App. 1934, judgm’t adopted). Apparently, these courts reasoned that “[W]hile typically a lease executed by a term interest holder would not endure beyond the interest holder’s estate, if a life tenant is granted the power to lease, but cannot bind future

interests, there is very little utility to the power because of the natural reluctance of any lessee to accept a lease which might be terminated by the death of the lessor.” N. Silo Res., LLC, 518 P.3d at 1087 (internal quotations omitted).

However, the Wyoming Supreme Court held that whether the reservation of executive rights allows a life estate holder to execute leases that extend beyond his or her lifetime ultimately turns on the language of the deed. In the case before the Court, the Lessors’ executive rights reservation stated that they “shall, during their lives, have the exclusive right and privilege of making, executing and delivering leases of the land for the extraction or production of minerals. On termination of this reservation, the interest reserved shall be owned by Grantees.” Id. at 1089. The Court found that:

This reservation of rights limits the time period during which the [Lessors] have the right of “making, executing and delivering leases” to their lifetimes. It does not, however, limit the nature of the leases that the [Lessors] can make—it does not limit the length of the leases the [Lessors] could enter to their lifetimes. The [Lessors] retained the power to execute oil and gas leases that extended beyond their respective lifetimes. . . . Accordingly, the lease to [Lessee] remains in effect according to its terms when the [Lessors’] life estate terminates.

Practitioners in Wyoming and beyond should be aware of the language employed in the Lessors’ executive rights reservation, the Court’s interpretation thereof, and the far-reaching effects it may have on life estate holders’ ability to encumber property with long-term leases.

Id.

Endnotes

1. Mr. Ellard is an attorney in Womble Bond Dickinson (US) LLP’s Charleston, South Carolina office. His practice includes handling a variety of real property matters. Mr. Ellard graduated from the University of Connecticut School of Law and is a Fellow in the American Bar Association’s Real Property, Trust and Estate Law Section. You can find more information on Mr. Ellard in his Firm biography and on LinkedIn

2. Much of the complex factual and transactional background is beyond the scope of this article, and irrelevant to the novel issue of law decided by the Court.

SECTION ARTICLES AND NEWS

Mindfulness: Finding a Bridge to Common Ground in These Polarized Times

By: Gisela M. Munoz, Associate Counsel, Florida Region, D. R. Horton, Inc.1

This is the final article in a three part series submitted by Gisela Munoz. Click here to read the first article From Mindfulness to “Findfulness”: Finding Purpose and click here to read the second installment Finding Peace: Less Stress is Within Your Reaction and Reach.

I. Introduction

In recent times, there seems to have been an increased polarization in our society. Undoubtedly, there have always been opposing views. Let’s face it, without them, there would not be a need for us attorneys! There have even always been conflicting positions at the extremes. That said, the ability to bridge the gap and find common ground and connection is becoming more difficult lately.

Some of you will immediately identify this in the political arena, where passing bipartisan legislation has seemingly become almost impossible. However, there have been reports in the past few years that this polarization has been permeating other facets of our lives, including all the way into our homes and personal relationships. As such, you may have experienced this widening gap and divisiveness in other areas of life, including in your real estate legal practice.

Mindfulness practices – particularly compassion exercises –can help us find a connection, even with difficult opposing counsel, and come to agreement. Ultimately, this may not only help us comply with the rules of professional conduct and achieve our clients’ goals, but also help us bring society back to a healthy balance.2

This is not to suggest that we should not have the fortitude to hold our ground on matters regarding our principles. Rather, “[r]eal strength lies in being able to yield when necessary, while understanding and staying true to your own core values. . . . [But

a]ssertiveness without compassion is aggression.”3

If you are not familiar with mindfulness, keep in mind that many companies, sports team, and even the U.S. military have offered mindfulness training. These are not organizations that are considered as lacking “strength,” and they are not offering the training as some sort of appeasement, but rather “to enhance the performance of their employees, soldiers, and players.”4 In the words of Judge Alan Gold, a senior U.S. district

court judge for the Southern District of Florida, mindfulness does not require you to “give up your edge. . . . What I am suggesting to you is no more than how martial arts masters deal with moments of intense conflict. . . .”5

Moreover, what we are dealing with in recent times is not a question of people adhering to their principles, while honoring the principles of others and finding ways to come to agreement when necessary to thrive, or even to survive. Rather, it is a toxic division between people that does not advance anyone’s cause and that causes damage – damage to our goals, emotional damage, and ultimately other long-term damage to our society that is yet to be seen.6 Instead of remaining divided, we can use mindfulness to build the bridge that will bring us back to finding solutions together.

II. Mindfulness and Its Effects

Mindfulness is not intended to be used to accomplish any specific objective, even though it turns out that mindfulness can be a helpful tool in achieving certain goals. So, what is mindfulness? Mindfulness is “paying attention in a particular way: on purpose, in the present moment and non-judgmentally.”7 The Mindfulness Based Stress Reduction Program, developed initially by trailblazer Jon Kabat-Zinn, places importance on curiosity in terms of how to approach the way we pay attention. In that vein, other mindfulness researchers have proposed another definition of mindfulness: “the self-regulation of attention with an attitude of curiosity, openness, and acceptance.”8

As I have stated above and in other articles and presentations, mindfulness should not be practiced to achieve other purposes, but rather it is its own end-goal. Its purpose is to keep us in the present moment, and, by doing that, it may result in beneficial side effects. That said, however, in this article, I am suggesting that we use mindfulness practices to attain those beneficial side effects. The key will be to remain in the present moment – engaged in mindfulness alone, without thought of any other goal – while practicing the mindfulness exercises.

So how can mindfulness help with the extreme divisiveness in the field of real estate law? Let’s begin with the problem of polarization in our real estate practice. In the last few years of transactional practice, there has been a shift to more prolonged, difficult negotiations, with some parties taking extreme positions that are sometimes difficult to justify under the auspices of reasonableness. You may also have seen this if you deal with real estate disputes, in terms of negotiated settlements. Beginning with a radical stance is not necessarily ultimately an issue (although the farther apart you start, typically, the more difficult it is to come to agreement). But being immovable in such a stance can be a problem, particularly when you are trying to make a deal with someone.

Further, this entrenchment in our own positions is coming at a time of increased violence in our communities. From attacks on law enforcement officers to aggression against protesters, from physical threats to judges to the intimidation of other justice officials, from school shootings to armed incursions into government buildings, we are seeing neighbors assault neighbors. Some studies have been done on this, and it appears that technology – including when used for social connection – has caused us to lose some of our true connection to others in the real world. For example, it has been found that, even when we “connect” with others by video conference, as we started doing more often during the COVID-19 pandemic, we are not able to take social and emotional cues from facial expressions via video in the same way as we do in person.9 Other factors may also be at play in creating a disconnect that allows people to treat others less humanely. This disconnect has allowed us to stop recognizing the humanity in our fellow neighbors, in some cases to the point of allowing violence. In other cases, the disconnect may not lead to violence, but can have a negative effect nonetheless.

This has also been found to play a role in the entrenchment in our positions. Social distance allows us to take even small differences and divide our society based on it. We identify with our one characteristic or viewpoint, and we then categorize the people who are even slightly different as foreign or alien to us – as being from a group with which we cannot identify. Essentially, we burrow into our position, equating our sense of self with it, to the point of classifying those with another perspective as “other” or even inferior.10 That, in turn, creates a vicious cycle, allowing us to continue to cling to our position, without considering the standpoints of those “others.”

“Mindfulness can […] help us [by shifting] our perspective in at least two ways: (1) by changing our view of things, once we are able to move our thought processes away from certain automatic knee-jerk reactions, and (2) by increasing our awareness of alternatives (i.e., possibilities) that might otherwise have been hidden from us. Both of these paradigm shifts are largely influenced by the parts of mindfulness practice that suspend judgment and encourage curiosity, allowing for open-mindedness, although paying attention on purpose/with intention to the present moment plays a part, as well . . . with the creation of space between stimulus and response.”11 In this way, we may be able to find a way to open our minds with curiosity to the other side’s point of view and see some value in it, finding a path toward it that will still work for our side.

In addition, there are mindfulness practices called compassion exercises or loving-kindness exercises, which are intended to switch our attention from judgment to caring and from isolation to connection.12 These types of mindfulness exercises are geared toward helping us to see other people as they are today,

rather than as we expect them to be or as they were in the past. In addition, they help us listen to – truly listen, with the intent of understanding – where they are coming from.

Listening, of course, is critical to connecting person-to-person, but also in our legal practice and from a legal ethics perspective. Obviously, communication is key to any relationship, and listening is a large part of communication. Moreover, the ABA Model Rules of Professional Conduct (the “Rules”) 1.4 and 2.1 require a lawyer to communicate with her clients and provide them with advice. The lawyer has to explain sufficiently, so that the client can (a) make an informed decision and (b) according to the comment to Rule 1.4, participate intelligently in the decision-making.13 If the client is the person with an entrenched or extreme viewpoint, the attorney will need to be sure that she is getting her message across to the client. Mindful listening to the client’s replies can key you into whether or not that is the case, as well as help you find ways to connect. Similarly, listening and maintaining an open mind and an open line of communications with opposing counsel are just as critical, both substantively in getting a deal done, as well as ethically in maintaining professionalism and civility. For example, the Rules have a preamble that states, “A lawyer should demonstrate respect for the legal system and for those who serve it, including judges, other lawyers and public officials.”14 Further, the attorney’s obligations include both pursuing her client’s interest, “while maintaining a professional, courteous, and civil attitude toward all persons involved in the legal system,” which, again, includes opposing counsel.15

Failing to listen to opposing counsel falls short of demonstrating the respect required by the preamble, even if opposing counsel is being difficult. Any lawyer who has been to court knows that no judge will accept the child’s excuse that the other attorney “started it.” Thus, even if we are not practicing before a judge, it would behoove us to behave as though we were; after all, we are all officers of the legal system. Moreover, beyond failing to listen, civility may also be called into question depending on the tenor of some communications between opposing counsel. By truly listening, with an open mind, curiosity, and compassion, to the reasons for our opposing counsel’s positions, we may be able to come to agreement, where we were previously at a stalemate – or even in an all-out fracas. Compassion mindfulness practices can help us achieve the civility and flow of communications with opposing counsel that have recently been shutting down during negotiations and help us to re-connect with opposing counsel, who are our colleagues and neighbors – and can even become our allies and friends.16

III. From the Disconnect to Connection: Compassion Mindfulness Exercises

If you would like to try mindfulness, either generally or as a way to achieve more connection and a path to common ground, then I have two suggested exercises in this section of

this article. At the end of this section, I will provide you with a more traditional compassion practice. It actually begins with self-compassion before proceeding to compassion for others, which is thought to be the most effective way to begin a compassion mindfulness practice. Despite that, I am going to begin differently here, with a compassion exercise of my own, that is short and that you can practice as you go about your day. (Nevertheless, if you find this first exercise difficult, it may become easier the more you practice the second exercise).

Now, the exercises below may seem simple to you. However, it turns out that they have a profound impact. First, it is important to understand that compassion is not the same as empathy. The brain circuitry related to the two have been found to be different. While empathy can result in pain being felt by the person empathizing, as well as ultimately in exhaustion and burnout, compassion is associated with positive emotions and positive health side effects. When engaged in compassion, the neural connection between the brain and other organs is increased,17 releasing oxytocin and decreasing the fight-or-flight hormones and their negative impacts, such as high blood pressure, heart rate, and inflammation.18

Further from a practical “outside world” perspective, many have noticed how, after practicing for a while, they have experienced a change in their own behavior that was unexpected. Sharon Salzberg recounts how her first week of self-compassion mindfulness exercises (see Section B below) felt mechanical to her. Then something bad happened to someone she knew, and she started recriminating herself because, in that week, she had not even gotten to the part of the exercise that departed from self-compassion to compassion for others. Yet later in the day, she ended up dropping a glass jar that shattered, and she immediately reproached her lack of coordination, but here is how it came out: “You are really a klutz, but I love you.” She was floored at the last part; the self-compassion practices had gotten through, and she was able to acknowledge her klutziness but treat herself with love and respect – with self-compassion.19 Other such stories have been told about unanticipated actions with respect to compassion towards others after engaging in compassion-based mindfulness practices.

On the other hand, rather than thinking that these exercises are simple, some of you may realize that they are more difficult than they seem. You may find it is difficult to maintain your attention without distraction, or you may find that it is difficult to make the statements below with true intention, when doing so with respect to certain people. If that happens, do not be discouraged. Remember that one of the tenets of mindfulness above is to be non-judgmental; that includes non-judgment of oneself. So do not reprimand yourself if your attention wanders, but rather simply bring your attention back to the present moment. Similarly, if you are having difficulty with the phrases below as to someone, do not berate yourself, but rather give yourself time. The more you engage in com-

passion mindfulness practices, the easier they should become.

Of course, please take into account any physical limitation that may affect you and adjust the exercises below to accommodate that.

A. Awareness Mindfulness Exercise

My first suggestion requires some self-awareness in your daily legal practice. When you receive a redraft of an agreement from opposing counsel or a counteroffer in an email, notice if you have an immediate reaction to that reply from the opposing lawyer. Was your reaction that the response from the opposing attorney was unreasonable? Maybe you thought it was unfair to your client? Perhaps you even felt some outrage and thought to yourself, “what a jerk”? Notice if you had these – or other such – judgments.

If so, then stop for two minutes and do the following.

~Sit in an upright position that feels stable.

~Allow your gaze to relax so that you are not trying to look at anything.

~Notice the sensations of where your body connects with the chair, the floor, etc. If you detect physical tension somewhere in your body, notice that and perhaps try to release the tension so you feel comfortable.

~Focus on your breathing. Simply notice your breath entering and leaving your body and follow its path through your body.

~Then, with curiosity, ask yourself whether there are other possibilities behind the opposing counsel’s counteroffer. Could there be an intent that you have misunderstood? Could you have understood it correctly, but there is a reason for it of which you are unaware? Could opposing counsel’s hands have been tied, because her client insisted?

~Finally, even if you have not come up with many – or any – such alternatives, can you release the reactive thoughts as against opposing counsel? In other words, can you disassociate the counteroffer from the person who sent the counteroffer? The person who sent the response IS NOT the response. As such, can you, therefore, continue to see opposing counsel as your human colleague – not someone who is “other,” because they sent a response with which you or your client disagree? Rather, can you see that attorney IS someone who, like you, has a client to represent and has a deal to make, and whom you will treat with respect and civility, and whom you will hear out as to why her client needs what was requested in the counteroffer, etc.?

B. Compassion Mindfulness Exercise

My second suggestion is that you try a time-tested compassion mindfulness exercise. This can be done during a break in the office, as well, but you may want to take more time for this and you may want to do this at home or even in a nature environment. When you read the statements below that are part of this exercise, you will see that they relate to people. However, some practitioners further expand the practice to proceed further to include animals and the planet as a whole living organism, with the thought being that compassion for the environment (i.e., environmental/climate awareness and responsibility) can even be enhanced through these types of mindfulness practices. Thus, sitting outside in nature when engaging in this compassion mindfulness exercise would be perfectly “natural” – pun intended!

Now, the phrases that I am using below are statements used by Sharon Salzberg, a world-renowned meditation teacher, New York Times best-selling author, and co-founder of the Insight Meditation Society, who has focused especially on compassion practices. That said, compassion mindfulness practice works best when the phrases used are particularly meaningful to you. As such, if the statements below do not resonate with you, then replace them with those that do have significance to you.

~Sit in an upright position that feels stable.

~Allow your gaze to relax so that you are not trying to look at anything.

~Notice the sensations of where your body connects with the chair, the ground, etc. If you detect physical tension somewhere in your body, notice that and perhaps try to release the tension so you feel comfortable.

~Focus on your breathing. Simply notice your breath entering and leaving your body and follow its path through your body.

~Begin saying the following statements to yourself, about yourself. (People sometimes ask from whom they are asking the following. The answer is that these are just offerings to ourselves – and, in the later statements, they are offerings to the persons about whom the statements are made).

~May I be safe.

~May I be happy.

~May I be healthy.

~May I live my life with ease.

~Then think of a neutral person in your life, about whom you do not feel particularly positively or negatively, and say the following statements to yourself, about that neutral person.

~May [insert that person’s name] be safe.

~May [insert that person’s name] be happy.

~May [insert that person’s name] be healthy.

~May [that person] live [his/her] life with ease.

~Finally, think of all people everywhere and say the following statement to yourself, about everyone.

~May everyone on the planet be safe.

~May everyone on the planet be happy.

~May everyone on the planet be healthy.

~May everyone on the planet live their lives with ease. 20

Now, after having practiced the above for some weeks, if you are dealing with a particularly difficult opposing counsel or other person in your life, you may use the above practice to help yourself in working with that person. After doing the first step regarding yourself, you might think about a person who has been especially kind to you, and repeat the exercise as to that person. Then, continue with the neutral party practice. Then, finally, think about the person with whom you are having difficulty and repeat the exercise as to that person with whom you are having difficulty.21

IV. Conclusion

In these polarized times, we often hear that we do not have to agree with one another. That is generally true to a point, but we also have to be able to come to agreements, whether that is at our dining room table at home, in our local or national legislative arena, or in our real estate transactions for our clients. We cannot allow ourselves to become entrenched in a position diametrically adverse to the opposing party, self-identify with that position, and then start seeing the opposing party and/or opposing counsel as somehow “other,” whom we simply cannot understand and with whom we cannot come to terms.

This is not to say that we all have to become alike and agree on everything. Rather, we must be able to find common ground in order to bridge our differences and come to agreements that all parties can, not only live with, but thrive with, while respecting our differences. Compassion mindfulness practices can help us build that bridge and walk across it in balance.

Endnotes

1. The views expressed in this article are solely the views of the author, not of the author’s employer or any organization with which the author is affiliated. This article is for educational purposes only and does not contain legal advice or therapeutic advice.

2. The author would like to thank opposing counsel and friend, Terri Sonn, Esq., of Sonn & Mittelman, P.A. in Aventura, Florida, for listening and offering feedback at the time when the author was creating the outline for this article.

3. “Hold Your Ground,” Breathe Mental Health 14 (display until July 8, 2022).

4. Paul Steven Singerman, “The Return on Investment from My Study and Practice of Mindfulness,” The Florida Bar Journal 26 (April 2016).

5. The Honorable Alan S. Gold, “The Art of Being Mindful in the Legal World: A Challenge for Our Times,” The Florida Bar Journal 18 (April 2016).

6. See Susanna Schrobsdorff, “Self-Care Doesn’t Have To Be Selfish: Mindfulness Teacher Shelly Tygielski on Generosity and Well-Being,” Time Magazine (Oct. 28, 2021), available at https://time.com/6110793/ why-self-care-doesnt-have-to-be-selfish-mindfulness-teacher-shellytygielski-on-generosity-and-wellbeing/

7. Mary Elizabeth Williams, “Why Every Mind Needs Mindfulness,” Time Magazine Special Edition: Mindfulness, The New Science of Health and Happiness 10 (2016) (quoting University of Massachusetts mindfulness pioneer, Jon Kabat-Zinn).

8. Ryan M. Niemiec, “3 Definitions of Mindfulness That Might Surprise You,” Psychology Today (November 1, 2017), available at 3 Definitions of Mindfulness That Might Surprise You | Psychology Today.

9. See Peter H. Huang, “Pandemic Emotions: The Good, the Bad, and the Unconscious — Implications for Public Health, Financial Economics, Law, and Leadership,” Northwestern Journal of Law and Social Policy, Vol. 16, No. 2, Article 3, 81, 85, (June 12, 2020) available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_id=3575101; see also Schrobsdorff, available at https://time.com/6110793/why-self-caredoesnt-have-to-be-selfish-mindfulness-teacher-shelly-tygielski-ongenerosity-and-wellbeing/; “Loving Kindness Meditation with Sharon Salzberg,” Mindful Magazine (Feb. 11, 2021), available at https://www. mindful.org/loving-kindness-meditation-with-sharon-salzberg/

10. See Mindful Magazine Staff, “Loving Kindness Meditation with Sharon Salzberg,” available at https://www.mindful.org/loving-kindness-meditation-with-sharon-salzberg/; see also Rhonda V. Magee, “‘If You Plant Corn, You Get Corn’: On Mindfulness and Racial Justice in Florida and Beyond,” The Florida Bar Journal 37, 38 (April 2016). Again, this can be taken as far as to the point of being considered (whether consciously or unconsciously) less than human or disconnected from humanity, such that they can be treated inhumanely, or at least unkindly.

11. Gisela M. Munoz, “From Mindfulness to ‘Findfulness’: Finding Purpose,” eReport 77, at 78 (ABA Real Property, Trust and Estate Law Section (September 2022)), available at https://issuu.com/rptelaw/ docs/ereport-2022-summer/s/16831131.

12. See generally Sharon Salzberg, “Why Loving-Kindness Takes Time,” Mindful Magazine (January 19, 2018), available at https://www.mindful.org/loving-kindness-takes-time-sharon-salzberg/; Magee, at 37-39; Huang, at 118-119.

13. See Model Rules of Professional Conduct 1.4 and 2.1 (ABA Center for Professional Responsibility 2020), available at https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/model_rules_of_professional_conduct_table_of_contents/

14. Id.

15. Id.

16. As a personal testimonial, in several circumstances, I have developed friendships with opposing counsel. We have even ended up referring business to one another and referring one another for professional awards, among other things. See, e.g., fn. 2.

17. This neural connection between the brain and other organs is called vagal tone, for the vagus nerve, which is the largest cranial nerve and is involved in the connection of the brain and other organs, such as the heart, among other things.

18. See “Loving Kindness Meditation with Sharon Salzberg,” available at https://www.mindful.org/loving-kindness-meditation-with-sharon-salzberg/ (citing neuroscientists and neurological studies, including the work of neuroscientist Tania Singer of the Max Planck Institute for Human Cognitive and Brain Sciences and neurosurgeon James Doty,

MD, professor at Stanford University, in the article’s “Getting to Compassion” section); see also Terry DeMeo, “How To Deal with Difficult People,” May 29, 2011, available at https://www.inner180.com/2011/05/ (describing the risk of absorbing the pain of others when using empathy).

19. See Salzberg.

20. See “Loving Kindness Meditation with Sharon Salzberg,” available at https://www.mindful.org/loving-kindness-meditation-with-sharon-salzberg/; see also Salzberg; Vinny Ferraro, “Plant Kindness,” Mindful Magazine 12 (June 2022).

21. See Salzberg.

FELLOWSHIP OPPORTUNITY

The ABA Section of Real Property, Trust and Estate Law Fellows Program encourages the active involvement and participation of young lawyers in Section activities. The goal of the program is to give young lawyers an opportunity to become involved in the substantive work of the RPTE Section while developing into future leaders.

Each RPTE Fellow is assigned to work with a substantive committee chair, who serves as a mentor and helps expose the Fellow to all aspects of committee membership. Fellows get involved in substantive projects, which can include writing for an RPTE publication, becoming Section liaisons to the ABA Young Lawyers Division or local bar associations, becoming active members of the Membership Committee, and attending important Section leadership meetings.

www.americanbar.org/groups/real_property_trust_estate/ fellowships-and-awards/fellows/

Applications due June 23, 2023.

How to Ensure Your Estate Planning Practice Can Never Be Replaced by AI

By: Ali Katz1 NEW LAW BUSINESS MODEL

As we all know by now, AI is getting more and more powerful every day. Up until recently, it didn’t seem like a real threat. However, today chatGPT is creating content that’s sometimes even better than human created content, and certainly much faster. This is a problem for Estate Planning Lawyers, who generate much of their revenue from document preparation, at least if you do estate planning the traditional way. In a year or two, a client will be able to go online, interact with their AI, and say: “Draft me a trust.” The AI will ask a series of questions and put together everything the client needs.

Within the next 3-5 years, most clients won’t need an Attorney who only provides documents or even an attorney who sells documents plus financial products. Clients will be able to run numbers, create documents and buy insurance and make investments on their own. So, what can the smart and savvy Estate Planning Lawyer do to ensure they can never be replaced by AI? The solution is to provide an innovative, high-value service that can never be replaced by technology, but that uses technology to create so much efficiency for you that you can focus on the parts of your law practice that rely on your heart and soul to deliver.

Don’t Compete with DIY Solutions - Do This Instead

You do not need to compete with DIY solutions. Instead, you can become the go to authority for your ideal clients by helping them decide what they can do themselves, and what they should rely on a lawyer (like you) to do for them. And here’s how you can actually benefit from the online DIY services and even get referrals from them. First, become the authority for everyone in your market who needs estate planning help by offering regular educational talks on estate planning, and what people can do themselves, and what they need a lawyer to do for them. Then, leverage the search terms of people in your community searching for DIY solutions and run paid ads to your target market based on those search terms, promoting your educational presentation.

Your job is to become known as the authority, expert, educator and to focus your authority, expertise, and education on giving as much as you can freely to those who do not need or want intimate access and support from you.

By doing this, you’ll scoop up the clients who want the professional help of a trusted authority who is knowledgeable enough to offer education. Through the education of your community, you will make it clear that the next step for those who cannot or should not DIY is to move into more connection with you, leading into your intake and engagement system. When your engagement and enrollment process is easeful, it will show clients just how much stress you’ll take off their plate when they work with you.

Focus on Providing the Human Connection That AI Can’t Provide

People want an emotional connection with a personal lawyer who is going to help them with the most intimate family and financial matters during life and be there for their family when they can’t be. They want a lawyer who cares about them and their needs. If you want to keep, and grow, your book of business, you must provide your clients with the connection they want, expand your emotional IQ and offer a lifetime of relational support that can never be replaced by robots. Do this and you’ll never have to worry about AI replacing you.

Your humanity is the only non-replaceable technology you have, and you can invest in cultivating your next level relational skills. It’s very likely the best investment you can make in your law practice—use technology to get extremely efficient so you can have the time to create more connection with your clients.

“Your humanity is the only non-replaceable technology you have, and you can invest in cultivating your next level relational skills.”

Create a Revenue Model That Isn’t Dependent on Commissions, AUM or Legal Documents

Along with developing your relational skills, you need to get ready to shift your income model. If you’ve been operating as a “trust mill” style estate planning lawyer, selling wills and trusts or even insurance or investments, you’re going to be hardpressed to get clients who are willing to pay for any of that in the future, even if you’re only charging $1500 or $2000 per plan. Why would they do with you what they can do themselves online?

Many websites like FreeWill.com and LifeLegacy.io already provide free legal documents. So what will you provide that’s different? When you return to the heart and soul of “lawyer as trusted advisor,” and have a financial model for your law practice that pays you to guide your clients throughout life and guide their family beyond their lifetime, your clients will happily pay you $4k-$6k up front on average. Then, when you set your practice up with systems you can receive hundreds to thousands a year per client throughout their life to maintain their plan, and then their family will hire you to provide guidance after their death.

This is what we guide our Personal Family Lawyer (PFL) law firms to do. If you become a PFL, you’ll discover a better revenue model, better service deliverables, better engagement strategies, and very likely, a whole new way of being YOU. The great news is, once you decide to embrace this change, you’re going to love your life and law practice a whole lot more. It’s the true fulfillment of why you went to law school in the first place. And you’ll discover a way to be a lawyer that is truly fulfilling, financially, emotionally, and spiritually, and can never be replaced by robots.

Endnotes

1. Ali Katz (former name, Alexis Martin Neely) is the Founder/ CEO of New Law Business Model, and the author of two bestselling books, Wear Clean Underwear: A Fast, Fun, Friendly - and Essential - Guide to Legal Planning for Busy Parents, and The New Law Business Model Revealed: Build a Lucrative Law Practice That You (and Your Clients) Love

Learn more at www.NewLawBusinessModel.com .

ANNOUNCING

The Fund for Justice and Education for The Section of Real Property Trust and Estate Law

The ABA, Section of Real Property, Trust and Estate Law Fund for Justice and Education (FJE) is the 501(c)(3) charitable fund that supports the public service, policy, fellowship programs, education, diversity, equity and inclusion work within the Section of the American Bar Association.

We will be launching a membership donor drive in June. Please be on the lookout for more information.

Commercial Real Estate Transactions Group

This group analyzes the transactional and ownership issues which confront commercial real estate attorneys when dealing with land transfers, construction, servitudes, title insurance, property and liability insurance, and ownership of commercial real estate. Each committee within the group focuses on one of these topics.

Real Property Groups and Committees (americanbar.org)

Elder Law and Special Needs Planning Group

The Elder Law and Special Needs Planning Group focuses on the legal concerns of the elderly and persons with disabilities. This Group consists of two committees – The Elder Law and Long-Term Care Committee, which focuses on Elder Law and long-term care, and the Special Needs Planning Committee, which focuses on legal and future planning for individuals with disabilities and/or special needs and their families.

Committee chairs and committee members are frequently asked to advise the Section leadership on policy positions to be adopted by the ABA House of Delegates. The Committees have been active in presenting CLE programs and in authoring articles for eReport, Probate & Property and the Real Property, Trust and Estate Journal. Finally, the Group hosts bi-monthly free Group calls with speakers. In the past the speakers have presented on such topics as: ABA Commission on Law and Aging, Special Needs Planning, Administering Special Needs Trusts, ABLE accounts, the World Congress on Adult Capacity, Medicaid Law update, Transferring Guardianships across state lines, Long Term Care Trust Act of Washington state, Nursing Home discharges, and Guardianships, to name a few.

Trust and Estate Groups and Committees (americanbar.org)

Committee Calls June 2023

REAL ESTATE FINANCE GROUP

June 7, 1 p.m. CT

Join Zoom Meeting

https://americanbar.zoom.us/j/95318709145?pwd=U1NldVlGNUpycnQrQWxPeGlDeHRXdz09

Meeting ID: 953 1870 9145

Passcode: 694404

888 475 4499 US Toll-free

877 853 5257 US Toll-free

MORTGAGE LENDING COMMITTEE

June 13, 9 a.m. CT

Join Zoom Meeting

https://americanbar.zoom.us/j/98806692494?pwd=VjBsN24xYXBjSlNqSkczaE1XaUFXQT09

Meeting ID: 988 0669 2494

Passcode: 686641

877 853 5257 US Toll-free

888 475 4499 US Toll-free

LITIGATION, ETHICS & MALPRACTICE GROUP

June 14, 12:30 p.m. CT

Join Zoom Meeting

https://americanbar.zoom.us/j/98233714614?pwd=RmpUemFsVExyRUxpQUlJR0V3eWxMZz09

Meeting ID: 982 3371 4614

Passcode: 693410

877 853 5257 US Toll-free

888 475 4499 US Toll-free

LEASING GROUP

June 14, 1 p.m. CT

Join Zoom Meeting

https://americanbar.zoom.us/j/97162745615?pwd=ZTZEblg4aDBMa2pYZkJqOEUrRDhIUT09

Meeting ID: 971 6274 5615

Passcode: 415358

888 475 4499 US Toll-free

877 853 5257 US Toll-free

BUSINESS PLANNING GROUP

June 21, 11a.m. CT

Join Zoom Meeting

https://schiffhardin.zoom.us/j/3122585522

Meeting ID: 312 258 5522

877 853 5257 US Toll-free

888 475 4499 US Toll-free

Employee Plans and Executive Compensation Group

The Employee Plans and Executive Compensation Group is a collection of attorneys who focus on a wide range of employee benefits issues. The Group consists of six committees, including: Fiduciary Responsibility, Administration, and Litigation; IRAs & Plan Distributions; Non-Qualified Deferred Compensation; Plan Transactions and Terminations; Qualified Plans; and Welfare Benefit Plans. The goal of the group is to be a valuable source of information and networking for attorneys who practice in this space.

Committee leadership provides regular substantive presentations to Group membership on an array of topics including ERISA fee litigation, SECURE Act 2.0, new SEC clawback rules, and proposed regulations on required minimum distributions. Our members also participate in CLEs and publish articles related to this practice area, and have opportunities through our partnership with the Joint Committee on Employee Benefits to attend meetings and technical sessions with federal agencies such as the IRS, DOL, EEOC and SEC. Join this group to receive notifications of upcoming group meetings and other opportunities to get involved.

Trust and Estate Groups and Committees (americanbar.org)

Residential, Multi-Family and Special Use Group

Although a diverse group, this group’s committees share the common thread of dealing with residential properties and issues that pertain to all types of residential properties. The committees include single and multi-family housing, senior housing and assisted living facilities, as well as affordable housing. These committees, with the exception of single family, also have a special emphasis on tax and zoning issues that pertain to multifamily/multi-generational residential housing.

Real Property Groups and Committees (americanbar.org)

THANK YOU SPONSORS!

The Section acknowledges the generous support of the following sponsors for their involvement in this year’s National CLE Conference:

GOLD

SILVER

BRONZE

LAW FIRMS

• Archer & Greiner, P.C.

• ArentFox Schiff LLP

• Ballard Spahr

• Brown, Hay & Stephens LLP

• Carlton Fields P.A.

• Chestnut Cambronne PA

• Dungey Dougherty PLLC

• Fredrikson & Byron, P.A.

• Gordon, Fournaris & Mammarella, P.A.

• Gutter Chaves Josepher Rubin Forman Fleisher Miller P.A.

• Jackson Walker

• K&L Gates LLP

• Levin Schreder & Carey

• Prather Ebner & Wilson LLP

• Saul Ewing LLP

• Sher Garner Cahill Richter Klein & Hilbert, L.L.C.

• Stone Pigman Walther Wittmann

CALLING ALL LAW STUDENTS!

The Section of Real Property, Trust and Estate Law is now accepting entries for the 2023 Law Student Writing Contest. This contest is open to all J.D. and LL.M students currently attending an ABA-accredited law school. It is designed to encourage and reward law student writing on real property or trust and estate law subjects of general and current interest.

1st Place

$2,500 award

2nd Place

$1,500 award

3rd Place

$1,000 award

n Free round-trip economy-class airfare and accommodations to attend the RPTE National CLE Conference. This is an excellent meeting at which to network with RPTE leadership! (First place only.)

n A full-tuition scholarship to the University of Miami School of Law’s Heckerling Graduate Program in Estate Planning OR Robert Traurig-Greenberg Traurig Graduate Program in Real Property Development for the 2023-2024 or 20242025 academic year.* (First place only.)

n Consideration for publication in The Real Property, Trust and Estate Law Journal, the Section’s law review journal.

n One-year free RPTE membership.

n Name and essay title will be published in the eReport, the Section’s electronic newsletter, and Probate & Property, the Section’s flagship magazine.

Contest deadline: May 31, 2023

Visit the RPTE Law School Writing Competition webpage at ambar.org/rptewriting.

*Students must apply and be admitted to the graduate program of their choice to be considered for the scholarship. Applicants to the Heckerling Graduate Program in Estate Planning must hold a J.D. degree from an ABA accredited law school and must have completed the equivalent of both a J.D. trusts and estates and federal income tax course. Applicants to the Robert Traurig-Greenberg Traurig Graduate Program in Real Property Development must hold a degree from an ABA accredited law school or a foreign equivalent non-US school.

Learn about Section of Real Property, Trust and Estate Law’s eReport

The eReport is the quarterly electronic publication of the American Bar Association Real Property, Trust and Estate Law Section. It includes practical information for lawyers working in the real property and estate planning fields, together with news on Section activities and upcoming events. The eReport also provides resources for seasoned and young lawyers and law students to succeed in the practice of law.

For further information on the eReport or to submit an article for publication, please contact Robert Steele(Editor), Cheryl Kelly (Real Property Editor), Raymond Prather (Trust and Estate Editor), or RPTE staff members Bryan Lambert or Monica Larys. Are you interested in reading FAQs on how to get published in the eReport? Download the FAQs here. We welcome your suggestions and submissions!

FREQUENTLY ASKED QUESTIONS BY PROSPECTIVE AUTHORS RTPE eReport

What makes eReport different from the other Section publications? The most important distinction is that eReport is electronic. It is delivered by email only (see below) and consists of links to electronic versions of articles and other items of interest. Since eReport is electronic, it is flexible in many ways.

How is eReport delivered and to whom?

eReport is delivered quarterly via email to all Section members with valid email addresses. At the ABA website, www.americanbar.org, click myABA and then navigate to Email, Lists and Subscriptions. You have the option of receiving eReport. Currently almost 17,000 Section members receive eReport.

What kind of articles are you looking for?

We are looking for timely articles on almost any topic of interest to real estate or trust and estate lawyers. This covers anything from recent case decisions, whether federal or state, if of general interest, administrative rulings, statutory changes, new techniques with practical tips, etc.

How long should my article be?

Since eReport is electronic and therefore very flexible, we can publish a two page case or ruling summary, and we can publish a 150 page article. eReport is able to do this since the main page consists of links to the underlying article, therefore imposing no page restraints. This is a unique feature of eReport.

How do I submit an article for consideration?

Email either a paragraph on a potential topic or a polished draft – the choice is yours – to the Editor, Robert Steele, at rsteele@ssrga.com , and either our Real Estate Editor, Cheryl Kelly, at ckelly@thompsoncoburn.com , or our Trust and Estate Editor, Raymond Prather, at ray@pratherebner.com

Do I need to have my topic pre-approved before I write my submission?

Not required, but the choice is yours. We welcome topic suggestions and can give guidance at that stage, or you may submit a detailed outline or even a full draft. You may even submit an article previously published (discussed below) for our consideration.

Do citations need to be in formal Bluebook style?

eReport is the most informal publication of the Section. We do not publish with heavy footnotes and all references are in endnotes. If there are citations, however, whether to the case you are writing about, or in endnotes, they should be in proper Bluebook format to allow the reader to find the material. Certainly you may include hyperlinks to materials as well.

Can I revise my article after it is accepted for publication?

While we do not encourage last minute changes, it is possible to make changes since we work on Word documents until right before publication when all articles are converted to pdf format for publication.

What is your editing process?

Our Editor and either the Trust and Estate Editor or the Real Estate Editor work together to finalize your article. The article and the style are yours, however, and you are solely responsible for the content and accuracy. We will just help to polish the article, not re-write it. Our authors have a huge variety of styles and we embrace all variety in our publication.

Do I get to provide feedback on any changes that you make to my article?

Yes. We will email a final draft to you unless we have only made very minor typographical or grammatical changes.

Will you accept an article for publication if I previously published it elsewhere?

YES! This is another unique feature of eReport. We bring almost 17,000 new readers to your material. Therefore, something substantive published on your firm’s or company’s website or elsewhere may be accepted for publication if we believe that our readers will benefit from your analysis and insight. In some cases, articles are updated or refreshed for eReport. In other cases, we re-publish essentially unchanged, but logos and biographical information is either eliminated or moved to the end of the article.

How quickly can you publish my article?

Since we publish quarterly, the lead time is rarely more than two months. If you have a submission on a very timely topic, we can publish in under a month and present your insights on a new topic in a matter of weeks.