WealthCounsel Quarterly - January 2016

Q UA R T E R LY W E A LT H CO U N S E L

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Contents From the Editor...................................................................................................3 Making Drafting Excellence Even Better: The Latest Highlights from WealthDocx.............................................................................................. 4 Uber: Playing Fair in the “Sharing Economy”?.......................................8

WC Quarterly MEMBER MAGAZINE

Finally… Clarity with Portability.................................................................. 12 The Estate Planning Lawyer’s Ethical Considerations....................... 16

Volume 9, Number 2 • Q2 2015

Charitable Gifts with Strings Attached ................................................. 22

STAFF

Thinking More Deeply on Trust Advisors and Protectors................ 24

SENIOR EDITOR

Uniform Protected Series Act: Coming Soon?....................................30 Matthew T. McClintock, JD EDITORS Jennifer Villier, JD

Income Taxation of Estates and Trusts................................................... 36 Member Spotlight........................................................................................... 42

Jeremiah Barlow, JD PRODUCTION EDITOR

Hindsight is 20/20: ........................................................................................48

Caryl Ann Zimmerman

A Review of Selected 2015 LLC Cases....................................................48

ART DIRECTOR

Education Calendar........................................................................................ 55

Ellen Bryant CONTRIBUTING WRITERS Lew Dymond, JD Jackie Wertheimer, JD

WealthCounsel Quarterly is published four times annually by WealthCounsel,

Jeramie Fortenberry, JD

LLC, P.O. Box 44403, Madison, WI 53744-4403. Comments and questions

Gregory Herman-Giddens, JD

about WealthCounsel Quarterly may be addressed to the editor at

Samantha Reichle, JD Katie H. Muhlenkamp, JD

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magazine@wealthcousel.com.

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From the Editor...

MATTHEW T. MCCLINTOCK, JD, VICE PRESIDENT OF EDUCATION, WEALTHCOUNSEL INNOVATION. It really isn’t the word most people associate with the practice of law – especially a “boring” kind of law like trusts & estates. The majority of attorneys who claim to practice T&E law are using the same forms and sample clauses they’ve used for decades or that they’ve borrowed, plundered, or pillaged from others. Many of them seldom think creatively about distribution guidelines, marital deduction options, trustee succession issues, inheritance protection, basis adjustment opportunities, or the ability to change the way a trust gets administered after it becomes irrevocable.

We believe that estate planning and business law needn’t be boring at all. But to advance the industry we must be creative, and part of a community with a shared commitment to innovation.

In this issue we’ll explore together some of the ways we believe the industry is innovating, and other ways where we think it should be. We will examine the use of trust advisors and trust protectors, uncover some of the sloppiness and confusion in practice today, and start working toward a different way to think about these power holders to try and shape the practice going forward.

Greg Herman-Giddens will examine one of the emerging frontiers of tax-driven planning with a careful look at key issues in fiduciary taxation. With innumerable multi-generational trusts in existence today – many of which are under active administration – much of the tax game of estate planning gets played on the field of fiduciary income tax. Even for attorneys who do not want to actively practice fiduciary taxation, a solid understanding of key issues is essential to competent practice.

key elements we must consider in order to provide modern planning and estate administration for married couples.

Business law must also evolve. One of the more innovative strategies in LLC design in the past decade is the use of series LLCs to establish intra-series asset protection for LLCs with diverse assets and members.

Many attorneys have been slow to use series LLCs, especially for actively operating businesses, due in part to the lack of uniformity among series LLC statutes and lack of clarity concerning their actual effectiveness. Jenny Villier discusses the possibility of a Uniform Protected Series Act for LLCs, which may begin to pave the way for more acceptance of series LLC strategies.

Jenny will also take a look at the Uber case making its way through the California court system. This multimillion-dollar case may have far-reaching implications for employers who hire employees and independent contractors, so it’s worthwhile to become familiar with the key issues while we await resolution of the class action litigation.

One longtime WealthCounsel member has built a practice on the bedrock of innovation, and you will meet her in this issue’s member spotlight. Eden Rose Brown has been with WealthCounsel from the beginning. Her creative and curious mind – coupled with patience and a desire to connect deeply with clients – allows her to develop new approaches to some of the stickiest client problems.

Whether we challenge some of your existing assumptions or make you think about something you’ve never considered before, we hope that this issue encourages you to add some creativity to your practice.

As ATRA came into bloom in early 2013 one of its most prominent features was permanent exemption portability for spouses. The Treasury issued final Regulations this year and Jeremiah Barlow discusses PAGE

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It takes a village to update and enhance WealthCounsel’s premier drafting product, and that village includes all our members. One of the most important aspects of our work is getting to know our members so that we can deliver a product that best suits their needs. Many of you have been extremely generous with your time and insights, and we are working hard to make the enhancements that you value most.

Our goal is to continuously improve our product and your experience using it. While we reaffirm our commitment to paying close attention to requests for new content and options, we are expanding our efforts to deliver the most benefit to the greatest num-

Making Drafting Excellence Even Better The Latest Highlights from WealthDocx LEW DYMOND, JD, WEALTHCOUNSEL PRINCIPAL AND FACULTY JACKIE WERTHEIMER, JD, VICE PRESIDENT OF CONTENT

ber of Wealth Docx subscribers. To that end, we’ve instituted several new member research initiatives in the last year, including focus groups, surveys, and advisory committees. We continue to solicit and receive your feedback in informal ways and through content support requests, but we are doing more to validate individual suggestions with the greater membership.

Some of these approaches leverage technology while others depend on personal interactions.

There is a team of people working on this initiative, and we have recently expanded that team so that we can gather more feedback and implement the results quickly. In addition to reviewing and implementing incremental improvements to strategies in Wealth Docx, our editorial team spends time providing content support. This allows our editors to hear from members

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directly. We are also increasing our focus on providing state specificity within the documents.

During the 2015 Symposium in San Diego we conducted several focus groups to help us determine what members look for concerning state specificity. In the past we have relied almost exclusively on input from state forum document committees, but based on the information gathered from the focus groups as well as submissions to content support, we are becoming more proactive when it comes to these matters.

As we sharpen our focus on state specificity, we will be addressing four types of state specific issues: notary blocks and will attestations, statutory references, state statutory documents, and necessary modification to existing Wealth Docx content. Please note that many of the screenshots shown below are currently in Beta and won’t appear in an update until they are fully tested. In addition to our own initiative, we will continue to rely on input from our state forum drafting committees as well as individual members.

NOTARY BLOCKS AND WILL ATTESTATIONS Wealth Docx has always inserted state specific notary blocks and will attestations into the merged documents based on the notary state selected in the Interview. All notary block and will attestation templates are being reviewed to make sure they are current. If you believe any of the notary block or will attestation clauses are not up to date for a particular state please let us know by submitting a Content Support Request.

There is an option to contact support from within the desktop and online versions of Wealth Docx, or you can send an email to support@wealthcounsel.com.

STATUTORY REFERENCES IN WEALTH DOCX

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opportunity to set the answer to the recommended reference and, if desired, set that reference as the default for future documents.

STATE STATUTORY DOCUMENTS For states that have recommended or approved statutory documents such as Statutory Short Form Durable Power of Attorney, we will be formatting, programming and then adding those to state folders under the State Statutory & Forum Templates Folder.

Because the statutory forms vary widely from state to state and frequently are not restricted to use with a specific document, these will be standalone templates and not part of another Wealth Docx Interview.

As we work through this initiative we will attempt to group the ancillary documents for each state together in a single interview for the state.

Wealth Docx has also addressed state specificity by allowing users to enter state statutory references, such as the name or statutory reference of the state principal and income act or fiduciary powers act. As part of our state specific initiative we will be including a recommended reference based on the state selected in the document assembly. You will then have the

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In most cases the state statutory documents will follow the language, structure and options as they are set forth in the state statute. The exception will be in cases where a State Forum has reviewed the state statute, made a determination that other options or provisions are permitted and submitted the requested options or additional provisions to the WealthCounsel Content Committee. An example of that is in the soonto-be-released California Advanced Healthcare Directive set forth in the California Probate Code §4701.

When assembling the California Advanced Healthcare Directive you will have the option of assembling the document exactly as set forth in the statute or with selected optional provisions and format.

ditional provision.

FOCUS ON INDIVIDUAL MEMBER REQUESTS Every Wealth Docx release has always contained many changes inspired by members. This year, we made those changes the focus of our efforts in the fourth quarter of 2015. These enhancements run the gamut from the addition of options in our interviews and new language in the assembled documents to expanded help text and improvements in formatting.

Here are some examples of what will be available early in 2016:

NEW OPTION We added a new option to the Revocable Living Trust (RLT) to allow for easier and less costly administration (compared to getting a probate court order).

NECESSARY MODIFICATIONS TO EXISTING DOCUMENTS Finally, through a joint effort on the part of the WealthCounsel Content Team, State Forums and direct input from members, we will address any modifications that need to be made to Wealth Docx to comply with state law. An example of this would be Florida Statute §737.115 – Notice of Trustee duties which states that a trust must contain a notice that the trustee may have duties and responsibilities in addition to those described in the trust document and goes on to give a sample of a provision that will comply with that requirement. When requesting a modification of this type, we will need the statutory or case authority along with the requested modified language or adPAGE

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NEW DIGITAL ASSETS SECTION

NEW COMPARISON CHART

Similar to the language included in many trust modules, we included a Digital Assets Section in the Fiduciary Powers Article of the Will as well as digital assets language to the Pour-Over Will.

To assist members with choosing the appropriate Will format, a comparison of the simplified and full versions will be included in contextual help within Wealth Docx and as resource on the Member Website.

Section 1.08 Digital Assets

Watch for more updates as we continue to improve your drafting with Wealth Docx.

My Fiduciary has the authority to access, modify, control, archive, transfer, and delete my digital assets.

Digital assets include my sent and received emails, email accounts, digital music, digital photographs, digital videos, gaming accounts, software licenses, social-network accounts, file-sharing accounts, financial accounts, domain registrations, Domain Name System (DNS) service accounts, blogs, listservs, web-hosting accounts, tax-preparation service accounts, online stores and auction sites, online accounts, and any similar original asset that currently exists or may be developed as technology advances.

My digital assets may be stored in the cloud or on my own digital devices.

My Fiduciary may access, use and control my digital devices in order to access, modify, control, archive, transfer, and delete my digital assets this power is essential for access to my digital assets that are only accessible through my digital devices. Digital devices include desktops, laptops, tablets, peripherals, storage devices, mobile telephones, smartphones, and any similar hardware that acurrently exists or may be developed as technology advances.

NEW INTERVIEW QUESTION A new question was inserted in the Pour-Over Will interview to identify an alternate disposition of the estate if the pour over fails.

NEW FEATURE You will be able to add the names of Disability Panel members to the Confirmation of Names and Fiduciaries ancillary in the Revocable Living Trust (RLT) and the Will.

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Uber: Playing Fair in the “Sharing Economy”?

JENNIFER L. VILLIER, JD Anyone unfamiliar with the “Uber” concept at the start of 2015 likely recognized it by year-end. “Uber,” meaning “an outstanding or extreme example” of something, is, according to the company’s website, “evolving the way the world moves.”

Is the Uber business model outstanding or extreme? If imitation really is the sincerest form of flattery, then it would seem that Uber certainly is both outstanding and extreme, as many other industries have attempted to copy the on-demand, app-driven, cashless business model that has brought Uber so much success.

Uber’s success, however, lies in the shadow of conflict and legal uncertainties. From issues related to liability and insurance, to lawsuits from taxi companies and unions, the company has faced unprecedented challenges as it continues to navigate the sharing economy.

Most recently, Uber has made headlines with continued labor disputes with its drivers. For instance, in cities across the U.S., UberBLACK drivers are striking over the company’s mandate that they must serve lower-paying UberX passengers. The drivers contend that they PAGE

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are being forced to incur higher overhead expenses (more expensive vehicles, increased maintenance and gasoline costs) and receive less pay.1

However, the biggest issue currently confronting Uber – and the one most instructive to industries and employers nationwide – is whether Uber’s drivers are employees or independent contractors. This article (i) summarizes the pending class action lawsuit against Uber by its drivers, (ii) considers the likely outcome given recent U.S. Department of Labor advice and other recent case law, and (iii) ultimately concludes that the independent contractor vs. employee distinction is one likely to continue to make headlines in 2016 and beyond as the sharing economy is fueled by the growth of companies like Uber. The lessons and lingering questions surrounding Uber’s business model are instructive to business planning attorneys representing clients on matters pertaining to the structuring of work arrangements with employees and independent contractors.

O’CONNOR V. UBER2

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ALLEGED MISCLASSIFICATION AS INDEPENDENT CONTRACTORS Under California law, the determination of whether a worker is an employee or an independent contractor involves a two-part analysis. First, a plaintiff presents evidence that he provided services for an employer.

This establishes a prima facie case that the relationship was that of an employer and employee.6 The burden then shifts to the employer to prove that the presumed employee was an independent contractor.7

In its 1989 Borello8 opinion, the Supreme Court of California enumerated a number of factors indicating an employment relationship exists. A court will analyze the Borello factors in determining whether the employer has satisfactorily rebutted the presumption of an employment relationship. The most significant factor is the putative employer’s “right to control work details” (i.e., the extent to which the employer retains “all necessary control” over the worker’s performance).9 Additional factors constituting “secondary indicia” of an employment relationship must also be considered.10 These include:

On September 1, 2015, Judge Chen of the U.S. District Court for the Northern District of California certified a class action lawsuit against Uber by drivers alleging they were misclassified as independent contractors rather than employees. The case, which began as a 2013 lawsuit by four Uber drivers seeking reimbursement for certain expenses such as gas and vehicle maintenance, now involves 160,000 current and former California-based Uber drivers. A decision in favor of the plaintiffs in this case would certainly have widespread implications, including a significant devaluation of Uber3 and a closer look at the practices of other businesses with similar business models.

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whether the service provider is engaged in a distinct occupation or business;

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the kind of occupation, and whether it is work typically done with or without supervision;

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the skill required in the particular occupation;

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whether the service provider supplies the instrumentalities, tools and place of work for himself;

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the length of time the services are to be performed;

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the method of payment (e.g., by time or per job);

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whether the work is part of the regular business of the principal; and

COMPLAINT

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whether the parties believe they are creating an employer-employee relationship.11

The issue at the heart of the Uber class action is the plaintiffs’ contention that Uber has violated California labor laws4 by failing to (i) reimburse its drivers for expenses directly incurred as a consequence of the drivers’ employment duties and (ii) pass on tips left for the employees by patrons. Thus, the class action turns on whether the drivers are in fact employees of Uber.5

Despite the plain language of the control test, which seemingly indicates that the principal’s “right to control” is a crucial factor, Judge Chen makes clear that “no one Borello factor is dispositive when analyzing employee/independent contractor status.”12 In citing case law that reached conflicting outcomes despite similar facts, Judge Chen highlighted the “flexibility” and “variability” of the Borello test.13 That flexibility PAGE

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and variability is precisely what makes the analysis unpredictable and the outcome seemingly arbitrary.

Thus, despite facts that seem to point in favor of the Uber drivers, it is difficult to predict how a jury would weigh the factors, particularly in light of contradictory legal precedent.

Nonetheless, Judge Chen seemed to find credence in many of the plaintiffs’ arguments. Judge Chen recognized that a number of secondary factors (such as plaintiffs using their own vehicles, plaintiffs’ ability to hire subcontractors or agents to drive on their behalf, and the parties’ agreement that no employment relationship exists) support an independent contractor classification. Yet, Judge Chen indicates that “even as to these factors, their significance is ambiguous.”14

Seemingly more persuasive to Judge Chen is the fact that Uber drivers are required to follow numerous detailed requirements imposed on them by Uber.

Furthermore, Uber drivers are monitored and graded using a star system of feedback provided directly by customers to Uber. Drivers are subject to termination based on their willingness to abide by Uber’s mandates and the grades received from customers. Additionally, Uber’s argument that it is a technology (and not a transportation) company seemed diluted by the fact that the company’s motto is “we are everyone’s on-demand private driver.” As such, its business could not exist without its drivers.

Notably, Uber is not paid unless its drivers drive. Certain taxi companies charge drivers a flat daily fee but no “per trip” stipend, permitting their independent contractor drivers to retain all proceeds from customers. Uber, by contrast, unilaterally sets the price of a given ride, collects the fares directly from customers, retains a percentage from each trip, and remits the remainder to the driver. The more drivers drive, the more money Uber makes (without incurring the overhead expenses associated with driving, such as gas and vehicle maintenance). Finally, Uber exercises substantial control over the qualification and selection of its drivers, by performing background checks, city knowledge exams, vehicle inspections, and personal interviews.15

The facts seem to stack in plaintiffs’ favor, and a recent California Labor Commissioner decision16 finding an Uber driver was indeed an employee, has bolstered commentators’ views that the Uber class action is not PAGE

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likely to go well for Uber. To be clear, the Labor Commissioner’s ruling has no precedential value in the present case, and applies only to the driver at issue in that decision.

ALLEGED VIOLATION OF CALIFORNIA TIP LAWS California Labor Code section 351 governs an employer’s obligation to remit employee-earned tips and gratuities to employees. Uber’s policy, as stated to customers on its website and in its marketing materials, is that a gratuity need not be paid to the driver because it is already included in the total cost of the car service. Plaintiffs’ contend that Uber has not remitted the total proceeds of gratuities to the drivers who earned them. In determining whether Uber is liable under section 351, the jury must first consider whether Uber took or received any gratuity from its riders. If so, then the jury must then consider whether Uber has paid or given the full amount of those tips to its drivers.

It seems plausible based on the facts that the first answer is yes, and the second answer is no, as Uber stipulated that it kept the entire amount of any tip that might be included in its fares. In other words, despite representing to customers that a tip was included in all of its fares, Uber never calculated, segregated or remitted any tips to its drivers.

The Uber class action will be brought before a California jury on June 20, 2016. While the litigation is based upon California law, the implications will undoubtedly be farther reaching than the Golden State. When coupled with the U.S. Department of Labor’s “Misclassification Initiative,” described below, the employee/independent contractor distinction will likely be among the primary employment issues facing businesses in the coming years.

DOL ADMINISTRATOR’S INTERPRETATION NO. 2015-1 During the summer of 2015, the U.S. Department of Labor issued Administrator’s Interpretation No. 20151, a document offering business owners additional guidance for properly classifying an “employee” vs.

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an “independent contractor.” The historic “economic realities” test, widely used by courts when determining a worker’s classification, consists of a number of factors that have over time been applied inconsistently and with certain factors given substantial weight over the others.17 The Administrator’s Interpretation does not change or reject the economic realities test, but rather sheds light on proper application of the test based on the circumstances.

In determining whether an individual is classified as an “employee” or an “independent contractor,” the DOL instructs that more attention and focus must be placed on the collective factors that make up the working relationship between an employer and its laborers, with no one factor being determinative. Additionally, the DOL emphasizes that most workers are employees under the Fair Labor Standards Act (FLSA) due to the statute’s broad definition of the term “employ.” The DOL’s “Misclassification Initiative” is therefore aimed at identifying those employees that are misclassified as independent contractors as a result of the manipulation of one or more factors of the economic realities test.

There are obvious advantages for an employer who classifies a worker as an independent contractor rather than an employee – less oversight, lower benefits-related costs, and reduced taxes, to name a few. Although independent contractor relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws. In Uber’s case, classifying its drivers as independent contractors has enabled the company to avoid the expense and obligations associated with an employer/employee relationship, including the need to comply with sometimes onerous state employment laws, such as the California Labor Code at issue in the Uber class action.

CONCLUSION Clearly, the DOL is dialing up their attention and scrutiny in the classification of employees vs. independent contractors. Administrator’s Interpretation No. 2015-1 provides guidance in the form of examples and citations to relevant case law to help employers properly determine a worker’s status. Attorneys representing small businesses or their workers should review the

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document and share with clients, while awaiting the highly-anticipated decision in the Uber class action.

ENDNOTES 1 Uber operates on a multi-tier pricing model based upon the car.

UberBlack drivers, for instance, are able to charge a higher fare in exchange for their investment in a high-end black sedan or other limousine-like vehicle. Sometimes, UberBlack drivers obtain access to the high-end vehicles through arrangements with third-party limousine companies. UberX drivers, by contrast, charge less but operate smaller, more modest sedans. Uber’s position is that available UberBlack drivers must help out with the excess demand of UberX users and charge them the lower, UberX rate. Furthermore, the drivers are not permitted to accept tips to make up for the reduced fare.

2 Douglas O’Connor, et al. v. Uber Technologies, Inc., No. C-133826 (N.D. Cal. 2015) 3 Uber’s profit margins and success are due in large part to its pricing structure and low overhead costs. Notwithstanding the substantial expenses Uber is facing in litigation, reclassification of its drivers as employees will potentially lead to fines, penalties, back pay liability, and increased overhead costs associated with employees and related benefits.

4 California Unfair Competition Law, Cal. Bus & Prof. Code § 17200 et seq., Cal. Lab. Code §§ 2802, 351.

5 The class action was partially certified. Judge Chen approved the class action with respect to the proper classification of the drivers as employees versus independent contractors and as to whether Uber improperly withheld tips. Judge Chen denied the plaintiffs’ request to certify a class action with respect to the expense reimbursement claims under section 2802 because “there may be substantial variance as to what kind of expenses were even incurred by [the putative employees] in the first place.” Harris v. Vector Mktg.

Corp., 753 F. Supp. 2d 996, 1022 (N.D. Cal. 2010).

6 Narayan v. EGL, Inc., 616 F.3d 895, 900 (9th Cir. 2010).

7 Id. 8 S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations (Borello), 48 Cal. 3d 341, 350 (1989).

9 Id. at 357.

10 Id. at 350.

11 See id. at 351.

12 O’Connor, et al. v. Uber Technologies, Inc., No. C-13-3826 (N.D. Cal. 2015) 13 Id. (citing Mission Ins. Co. v. Workers’ Comp. Appeals Bd., 123 Cal. App. 3d 211 (1981) and Alexander v. FedEx Ground Package Sys., Inc., 765 F.3d 981 (9th Cir. 2014)).

14 Id. 15 Id. 16 Barbara Ann Berwick v. Uber Technologies, Inc., No. 11-46739 EK (Cal. Labor Comm’r, June 3, 2015).

17 The economic realities test generally weighs the following five factors: (1) the degree of control exercised by the alleged employer; (2) the extent of the relative investments of the [alleged] employee and employer; (3) the degree to which the “employee’s” opportunity for profit and loss is determined by the “employer”; (4) the skill and initiative required in performing the job; and (5) the permanency of the relationship. United States v. Silk, 331 U.S. 704 (1947).

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Finally…

Clarity with Portability JEREMIAH H. BARLOW, JD

We all know what portability is, but the IRS has now produced finalized regulations about how to apply portability. After five years of ambiguity and temporary regulations, the 2015 final regulations have ushered in a new season of clarity for portability.

PORTABILITY – THE BASICS The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 20101 amended section 2010(c) of the Internal Revenue Code to allow the estate of a decedent who is survived by a spouse to make a “portability election.” A “portability election” allows the surviving spouse to apply the Deceased Spouse’s Unused Exclusion (DSUE) amount to the surviving spouse’s own transfers during life and at death. Portability was set to expire December 31, 2012. However, in January 2013, the American Taxpayer Relief Act of 2012 made the portability provisions permanent.

In 2012, the IRS issued temporary and proposed regulations that clarified the portability election that was put into effect in 2010. On June, 16, 2015, the IRS released final regulations.2 (The temporary regulations continue to apply to estates of decedents who died between January 1, 2011 and June 12, 2015.)

The original portability requirements remain unchanged by the final regulations, which are as follows: 1) the decedent must be a U.S. citizen; 2) the DSUE amount portability election must be made on a timely filed 706 within 9 PAGE

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months of the decedent’s date of death, or when allowed, within 15 months using an automatic extension; 3) the estate tax return must be complete and property prepared; and 4) the unused exclusion amount may only be used from the “last deceased spouse.”

sary to establish the right of the estate to the marital or charitable deduction of the property. By electing this option, the executor is responsible for estimating the total value of the gross estate based on the executor’s good faith and due diligence in valuing the assets.

A LOOK AT THE FINAL REGULATIONS:

Importantly, this rule is not available if the value of the property is needed to determine the estate’s eligibility for another estate or GST tax provision where the value of the property must be known.

The final regulations clarified several issues that had lingered with the temporary regs. We will consider each of them in turn.

How will extensions be treated for purposes of satisfying the “timely filed” requirement (especially for estates under the threshold)?

In order to elect portability, an executor must file a timely estate tax return, which is defined as 9 months after the date of decedent’s death.3 The final regulations clarify that if an estate is required to file an estate tax return because the estate is over the federal estate tax threshold ($5.45 million in 2016), an extension to elect portability under Regs. Sec. 301.9100-3 may not be granted because the due date for the return is governed by statute. However, if an estate is under the threshold, the IRS may grant an extension of time to elect portability.

Who is responsible for making the decision to file for portability?

The decedent’s executor is responsible for deciding whether to make the portability election or not.

If there is no appointed executor, “any person in actual or constructive possession” of any the decedent’s property may file the estate tax return. If the elector chooses not to make an election, he or she can do so by either making an affirmative statement on the estate tax return or by not filing a timely estate tax return.

How do you make an election with assets qualifying for marital or charitable deduction?

A valid portability election is made on a complete and properly prepared estate tax return. For those wanting to take advantage of portability, but do not need to file an estate tax, a special rule applies for valuing assets that qualify for the marital or charitable deduction.4 If this rule is used, the executor is only required to report the description, ownership, and/or beneficiary of the property, along with information neces-

How do we determine the DSUE Amount?

The value of the DSUE amount is critical for portability, as it determines what amount can be claimed by a surviving spouse. Calculating the DSUE amount starts by using the basic exemption in the year of the decedent’s death. Next, if the decedent paid gift tax on taxable gifts because the taxable gifts exceeded the applicable exemption amount at the time of the gift, then these gifts are exempted from adjusted taxable gifts for the purposes of computing the decedent’s DSUE amount. This adjustment is necessary so that the decedent’s exemption amount is not used for amounts on which gift tax was paid.

The final regulations state that the eligibility for the estate tax credit does not factor into the calculation of the DSUE amount. Rather, estate tax liability is calculated by first subtracting the applicable credit amount and then applying the credits under Secs.

2012 through 2015. Any unused credit is lost, so there is no need to adjust the computation of the DSUE amount to account for any unused credits.

The impact of the “last deceased spouse” provision The surviving spouse can claim any unused exclusion amount that is left over from the death of the first spouse to die, but the decedent must still be the survivor’s “last predeceased spouse” when use is made of transferred amount. The last predeceased spouse is the most recent deceased individual who was married to the surviving spouse at the individual’s death.5 The final regulations state that, if the surviving spouse has more than one deceased spouse, an ordering rule is applied. First, count any gifts made by a surviving spouse using the DSUEA of the last deceased spouse, is determined by the date of each gift, before using up the surviving spouse’s exemption amount. Next, the surviving spouse’s DSUE amount becomes the PAGE

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DSUE of the last deceased spouse, plus any DSUE actually applied to the surviving spouse’s taxable gifts to the extent the gift was from a decedent who is no longer the deceased spouse.6 Importantly, the final regulations indicate that the IRS may scrutinize returns of every deceased spouse of the surviving spouse in order to adjust, or even eliminate, the DSUE amount, irrespective of any statute of limitations. Importantly, this expanded scrutiny only applies to adjusting the DSUE amount, and does not toll the limitation period for any prior estate tax returns.

How does portability work with noncitizen spouses and Qualified Domestic Trusts?

Qualified Domestic Trust (“QDOTs”) are particularly interesting when it comes to portability. Specifically, where a non-citizen spousal beneficiary of a QDOT later becomes a United States citizen. Prior to the final regulations, a U.S. citizen decedent could pass his or her DSUE amount to a non-U.S. citizen surviving spouse, as long as it is in left in a QDOT. However, there would be no portability of the DSUE amount to the surviving spouse until the assets of the QDOT are fully subject to estate tax (e.g. when the surviving spouse dies). At the surviving spouse’s death, the predeceased spouse’s DSUE amount would then be reported on the surviving spouse’s estate tax return.

IN SUMMARY With clarity on these issues the IRS has created a clearer map for practitioners to navigate what has felt like a portability minefield. We now have direction on the timeline for filing for portability, who is responsible, how to determine the DSUE amount, and how remarriage may affect portability. All vital pieces of information when planning with clients to use portability.

There are still some unknowns that went unaddressed in these regulations. For example, the IRS provided no guidance on whether a QTIP election8 is valid when electing portability, particularly when an estate does not exceed the estate tax exemption. Some say that there is no need for clarification on this point because with portability, an executor may choose to make a QTIP election solely to preserve a decedent’s exclusion amount to use it in the future. But absent clarity from the Service, the question may remain.

ENDNOTES 1 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L 111-312 2 See, T.D. 9725 3 See, Sec. 2010

The final regulations allow a surviving spouse who becomes a U.S. citizen after the decedent spouse passes away to use the DSUE amount of the deceased spouse.7 The surviving spouse can use the DSUE amount as of the date he or she becomes a U.S. citizen as long as the estate of the deceased spouse elected portability. This is helpful as no additional steps are necessary other than the proper and timely filing of an estate tax return.

4 Special rule is codified under Regs. Sec. 20.2010-2(a)(7)(ii)(A)

Is there a short form return if we’re just filing for portability?

Journal of Accountancy, found at http://www.journalofaccountancy. com/news/2015/jun/irs-portability-rules-for-estate-tax-201512499.html

No. The IRS rejected the idea of a short form estate tax return to be used only to elect portability when an estate tax return is not otherwise required. The reasoning given by the IRS for this decision was that use of short and abbreviated forms creates accuracy and administrative problems.

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5 Appling only to deaths after December 31, 2010 6 See example illustrations provided with the final regulations 7 See Treas. Reg. § 20.2010-3(c)(2) and Treas. Reg. § 25.25052(d)(3)(ii).

8 Made under Sec. 2056(7)

REFERENCES:

U.S. Government Publishing Office, found at http://www.gpo.gov/ fdsys/pkg/FR-2015-06-16/pdf/2015-14663.pdf http://www.currentfederaltaxdevelopments.com/blog/2015/6/20/ final-portability-regulations-issued-by-irs http://www.kpmg.com/us/en/issuesandinsights/articlespublications/taxnewsflash/pages/2015-1/final-regulations-portability-ofdeceased-spousal-unused-exclusion-amount.aspx

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The Estate Planning Lawyer’s Ethical Considerations KRISTIN YOKOMOTO, JD - WEALTHCOUNSEL MEMBER SINCE 2014

All lawyers practicing in every area of the law owe ethical and performance duties to their clients, the breaches of which can result in severe consequences.

However, due to the unique nature of estate planning which may involve, among other types of planning: (a) planning for joint clients; (b) planning for a death which will occur at a future date; (c) planning for the purpose of benefiting third parties; or (d) planning for benefits which revolves around potentially changing tax and related laws, this area of law is specifically plagued with ethical issues and malpractice pitfalls. A novice, and even an experienced estate planner, can too easily become named as a defendant in an action alleging ethical violations or negligence, both of which could lead to disbarment and legal malpractice liability.

Interesting, is the intertwined relationship between ethics and legal malpractice. In some states, the applicable rules provide that the ethical rules are not intended to create civil causes of action; yet, despite such disclaimer, it is clearly established that breaches of ethical duties can give rise to causes of action for legal malpractice and breach of fiduciary duty. For example, a breach of the duty of confidentiality owed to a client or an unaddressed conflict of interest could both result in a negligence claim. Similarly, there are many unrelated, yet potentially related, additional considerations for estate planning lawyers such as fee agreements, trust accounting, capacity determi-

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nation, potential duties to beneficiaries and property transmutations, all of which could lead to allegations of ethical violations, negligence or other disputes.

This article highlights some non-state-specific ethical considerations applicable to estate planning lawyers with reference to some of the commentary from the American College of Trusts and Estate Counsel (ACTEC)1 2. The purpose of this article is to bring attention to some of the gray or conflicted ethical areas to help ensure that adequate policies and procedures are employed to identify and handle such issues.

While hindsight is 20/20, there is no reason to have to learn from mistakes when awareness and proper handling may prevent them from occurring.

The below hypotheticals with facts common to real situations will highlight some of the ethical considerations to be identified and addressed by an estate planner. Upon review of the facts, note the ethical issues and questions which arise, consider the information that would be needed in order to give sound advice and weigh the impact of different options.

HYPOTHETICAL #1: An advisor tells you that he has referred a married couple to you for estate planning. The husband calls you the next day to schedule an appointment for him to discuss estate planning for him and his wife who is unable to attend. You schedule a time and

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send him a worksheet. Upon review of the worksheet, you discover that husband was previously divorced, has one child with his ex-wife, a vacation home which he purchased before his current marriage with an outstanding mortgage and a home in his name only which he purchased during his current marriage. Wife is the co-owner of an S corporation and is expecting an inheritance from her parents.

Together they own one residential home, stocks and cash and have one child. The total estate is valued at approximately five million dollars with husband’s estate valued at three million and wife’s estate at two million. They have asked you to serve as their successor trustee.

Who Is the Client? It is essential to determine who the lawyer’s client is in order to define the duties owed to such client. A husband and wife seeking joint estate planning is a very common situation. The lawyer should meet and talk with both potential clients, not just the husband, and the client worksheet should be approved by both. In some states, it is common for the husband and wife to become joint clients for estate planning services; while, in other states, lawyers regularly represent the spouses as separate clients. If the choice is joint representation, then all information parted by one client to the lawyer will be assessable to the other client and thus, the attorney-client privilege will not apply between the clients. Accordingly, if future litigation arises, there is no protection from disclosure of evidence. In contrast, if the choice is separate representation, then there is no duty to disclose client confidences from one spouse to the other spouse.

What is the Scope of Representation? While narrowly defining the scope of representation in the engagement letter is essential, it is often mistakenly overlooked or addressed by a form engagement letter without specific review. A carefully prepared provision in the engagement letter could turn helpful in defending a legal malpractice claim for failure to adequately provide certain services. Equally important is the disclosure by the lawyer to the client of the omitted services that the lawyer will not be performing, such as the funding of certain assets or providing updates on future changes to the tax and related laws which could impact their estate planning.

Conflicts of Interest - Potential conflicts of interest exist in every joint representation matter. Joint rep-

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resentation can also make certain ethical duties that a lawyer has to his or her clients challenging to fulfill, such as the duty of loyalty and duty to maintain confidences. As with conflicts with former clients, if the conflict between the joint clients is only potential, most ethical rules allow the lawyer to represent both parties if he or she obtains informed written consent and waivers. In obtaining the waivers, the lawyer must discuss examples of actual conflicts that could arise and ensure that the clients understand the effect that joint representation has on the practical ability of the lawyer to keep client confidences. The lawyer also needs to explain that, upon the happening of an actual conflict, he or she may be required to withdrawal from representing either of them. For example, if one spouse undertakes to conceal assets from the other spouse, it would be inappropriate under the rules to continue joint representation. As an aside, conflict checks should also be run against husband’s former spouse and the wife’s business and co-owner.

Competency - The Model Rules require that lawyers act competently, which essentially means that the lawyer shall not intentionally, recklessly or repeatedly fail to perform legal services with competence. The rules require that the lawyer must be able to apply the diligence, learning and skill, and mental, emotional and physical ability reasonably necessary to perform the requested services. If the lawyer does not have sufficient learning and skill, then the lawyer may nonetheless perform such services competently by associating or consulting with another lawyer reasonably believed to be competent or by acquiring sufficient learning and skill before performing the services. If the lawyer co-counsels with another lawyer, depending on the applicable state laws, disclosure must be made to the client in writing.3 Note that mistaken judgment does not necessarily reflect a lack of competence.4 Further, while the lawyer has a duty to engage in thorough research sufficient to enable the lawyer to make an informed and intelligent judgment on a client’s behalf, the lawyer generally does not have a duty to advise a client on remote or tenuous positions and outcomes.

Duty of Diligence – The ethical rules provide that a lawyer shall act with reasonable diligence and promptness in representing a client. This means that the lawyer must move forward with the estate planning engagement on a timely basis.5 It is important that any PAGE

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lawyer who takes on an estate planning engagement is ready, willing and able to produce documentation that reflects the client’s intent within a reasonable period of time.

Engagement Letters - Some states require that the engagement for legal services be provided to the client in writing.6 7 Among other things, conflicts of interest and the related written waivers, payment of referral fees, co-counsel arrangements, payment of fees on another’s behalf or the lack of malpractice coverage should be disclosed in the engagement letter or other written documentation. In fee disputes, the arbitrators or judges will scrutinize, among other things, the scope of services provision and calculation of fees, whether fixed, hourly or a combination. The engagement letter can also be very helpful in stating the time frame for the completion of particular services which can appropriately set client expectations.

Referral Fees - The referring advisor is an insurance agent and lawyer. In most or all states, lawyers are prohibited from sharing fees unless it is with another lawyer. Whether the lawyer can pay a referral fee in this instance may depend on whether the agent provided the clients with insurance products or legal services. If a referral fee is to be paid, such would need to be disclosed in writing to the clients.8 Separate Property Transmutation - If the lawyer practices in a community property state, representing a husband and wife with separate property can be tricky. The relevant trust provisions, schedules and any property agreements need to be carefully completed and acknowledged, especially if there is any quasi-community property. In this instance, a portion of husband’s vacation real property may be transmuted if the outstanding mortgage is being paid with community property funds. Similarly, the other property which he purchased during marriage may constitute quasi-community property. The lawyer has obligations to discuss these issues with the couple and may have an obligation to properly address the property ownerships in the trust schedules or property agreements. Upon a divorce filing, family law lawyers will often call the estate planning lawyer as a witness if one spouse is claiming separate property, while the other spouse claims that such has been transmuted to community property through their estate planning.

Lawyer as Trustee - Husband and wife have requested PAGE

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that the lawyer serve as successor trustee. Lawyers should check their state’s laws on any prohibitions on the drafting lawyer’s ability to serve as trustee. Note that the drafting lawyer’s inclusion of an exculpatory clause in the trust may create a conflict of interest if the attorney is also named as trustee.9 10 Also, the lawyer may have limitations on compensation for serving as trustee. Even if there are not any problems raised by the lawyer serving as trustee, most commentators take the position that the lawyer should avoid agreeing to serve as trustee.

HYPOTHETICAL #2 What if the assets of the husband and wife exceed the current gift and estate tax exemption amounts?

Advanced Planning – If husband and wife’s assets exceed the current gift and estate tax exclusion amounts, the lawyer may be ethically obligated to advise them on the potential benefits of additional planning. If the clients desire to implement advanced planning, the lawyer would need to be competent to provide such services or co-counsel or acquire the required skills in a diligent manner. If the decision is not to help them with advanced planning, such should be clearly stated as a specifically omitted service in the scope of representation provision in the engagement letter.

HYPOTHETICAL #3 Wife has asked you to prepare a buy-sell agreement for her business with her co-owner and recommend an insurance agent who can issue an entity-purchase policy.

Who is the Client? Again, the first task is to determine who the lawyer’s client is for the requested legal services. Generally, it would be the business. In such case, the co-owners would need to understand that the lawyer is not representing either of them as individuals.

What is the Scope of Representation? - The engagement letter with the business should carefully define that the scope of representation of the business is solely for the purpose of drafting the buy-sell agreement between the business and its owners and excludes providing any advice to the owners or their spouses.

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Conflicts of Interest - The potential conflicts of interest which could arise need to be discussed thoroughly with wife, co-owner and husband. The lawyer should disclose to the co-owner that the lawyer has separately prepared wife and husband’s estate planning. Equally important is for husband to understand that by signing a spousal consent to the terms of any buy-sell agreement he may be giving up some rights, such as the right to become a shareholder upon his wife’s death. Each party in this instance should be advised, and given the opportunity, to seek independent counsel and written informed consent and conflict waivers would be necessary.

Agent Referral – Referrals are always risky. If a matter ends up in litigation, plaintiff’s lawyer will often sue all involved in the chain, including the referral source. Even if the claim against the referral source is unsuccessful, defending any types of claims exhaust time, money and usually result in higher malpractice policy renewal premiums. Clearly, the lawyer cannot accept a referral fee from the agent. But, also, some states disallow lawyers from participating in organizations where the organization’s purpose is to increase business through referrals by having paid membership and one individual from each area of service. 11 If the lawyer is a member of such an organization, he or she may want to refer several options to the clients.

HYPOTHETICAL #4 Wife asks if you can review her parents’ A-B-C qtip trust prepared prior to the enactment of the 2012 American Tax Payer Relief Plan which permanently set the gift and estate tax exemption to five million dollars per individual, as adjusted for inflation. Their estate consists mainly of commercial buildings valued at approximately nine million dollars. Her father is healthy, but her mother may have the early onset of mild dementia.

Who is the Client? The same analysis of representing her mother and father, as joint clients, would need to be considered. Note that while the lawyer generally does not represent the beneficiaries, there is a line of legal malpractice cases brought against lawyers by beneficiaries who claimed to be negatively affected by amendments or restatements

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to trusts. Especially in this instance where the lawyer already represents a beneficiary, the daughter, who is also the one referring them to the lawyer.

What is the Scope of Representation? While estate planning lawyers are often asked to review an existing trust, such can create a complicated situation and the lawyer may be deemed to have assumed responsibility for the entire trust. Accordingly, any services to amend or restate the trust should be clearly defined as beneficiaries often mistakenly believe that the lawyer represents the estate or trust and thus, the beneficiaries. In this instance, an amendment of the funding clauses of the trust could result in significant income tax savings if the A-B-C qtip trust is amended to an A-C trust or A trust with a disclaimer. The lawyer may have the responsibility to explain this to the clients and suggest the different funding options and consequences.

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Conflicts of Interest - It is fairly common for an estate planning lawyer to represent multiple family members, as well as multiple generations of the same family. However, such multiple representation can be complex and risky. It is important to analyze each set of circumstances independently to determine if representation is proper. The analysis should include, among other things, determining: (1) if any one representation would be directly adverse to another; (2) if a potential beneficiary, who is also a client, has a legal right to another potential client’s bequest or a mere expectancy; or (3) if there is a significant risk that the representation of one client will be materially limited by the lawyer’s duties to another client, such as the duties of loyalty and confidentiality.

Legal Capacity - Estate planning for the mentally impaired, sick and aging raises major capacity and undue duress concerns. As our population lives longer, issues of capacity have become increasingly impor-

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tant. A complete discussion of capacity is outside of the scope of this article; however, it is critical for lawyers to research their various state rules on capacity12 and the lawyer’s role in determining legal capacity.

The ACTEC Commentaries provide that if testamentary capacity is uncertain, the lawyer should exercise particular caution in assisting a client to modify an estate plan or seek court assistance.13 Especially in this instance where an amendment to the funding formula could result in significant income tax saving.

IN SUMMARY Estate planning lawyers’ duties to clients include, among others: •

the duty of loyalty

•

the duty to maintain confidences

•

the duty to adequately disclose conflicts and obtain informed written consents and waivers

•

the duty to provide competent representation

•

the duty to perform services diligently

•

the duty to ascertain legal capacity

•

the duty to inform and communicate with clients

•

the duty to preserve confidences after death of client

These ethical duties are taken seriously by the courts.

Having proper policies and procedures in place to identify these ethical considerations with checklists to ensure compliance will help to defend against any state bar investigations or malpractice claims.

ENDNOTES 1 ACTEC recognized that the American Bar Association’s Model Rules of Professional Responsibility (MRPR), which have been enacted with amendments by the majority of the states, Puerto Rico and the Virgin Islands, and comments thereto failed to provide adequate guidance on the professional responsibilities of lawyers practicing estate planning, trust and probate law. Thus, in 1994, ACTEC promulgated the Commentaries on the Model Rules of Professional Conduct (ACTEC Commentaries).

2 Check your state bar for ethic guidelines specific to estate planning. In California, the Trusts and Estates section of the California State Bar publishes a Guide to the California Rules of Professional Conduct for Estate Planning, Trust and Probate Counsel.

3 Model Rule 1.5(e) allows attorneys to fee share or fee split if the division is proportionate to the work performed or both attorneys

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assume joint responsibility, the client agrees in writing to the share to be received by each attorney and the total fee is reasonable.

4 ACTEC Commentary on MRPC 1.1 provides that: “In some instances the facts are unclear or disputed, while in others the state of the law is unsettled. In addition, some applications of law and determinations of fact made by courts or administrative agencies are not reasonably foreseeable. In other instances, the complexity of a transaction or its unusual nature generate uncertainties regarding the manner in which it will be treated for tax or substantive law purposes and may prevent an otherwise thoroughly competent lawyer from accurately assessing how the transaction would be treated for tax or substantive law purposes.”

5 The ABA comment to this rule sets a high standard, stating that the lawyer should “take whatever lawful and ethical measures are required to vindicate the client’s cause or endeavor” and “a lawyer should carry through to conclusion all matters undertaken for a client.”

6 In California, all services for which the attorneys’ fees will exceed one thousand dollars are required to be in writing with a fully executed copy delivered to the potential client.

7 See ACTEC sample engagement letters - http://www.actec.org/ publications/engagement-letters/ 8 Model Rule 5.4 generally prohibits sharing fees with non-lawyers.

9 Model Rule of Professional Conduct 1.8(h) provides that attorneys shall not make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement.

10 However, the ACTEC Commentary on Model Rule 1.8 states that, at the client’s request and under certain circumstances, a lawyer may properly draft an exculpatory provision in a document that appoints the lawyer as a fiduciary.

11 Some states have issued opinion letters banning lawyers from participating in certain organizations that seek to increase business through referrals among the members because participation in such could create undisclosed conflicts of interest, compromise a lawyer’s professional independence, as well as violate solicitation rules.

12 For instance, California has different capacity standards for wills and simple amendments versus complex trusts.

13 ACTEC Commentary on Model Rule 1.14 provides that in cases involving doubtful testamentary capacity, the lawyer should consider seeking court supervision of the proposed estate plan, including substituted judgment proceedings.

ABOUT THE AUTHOR Kristin Yokomoto is the founder of Balanced Legal Planning, APLC which specializes in Estate Planning and Business Planning in Newport Beach, California.

Kristin helps her clients by providing plans which balance benefits and risks. She can be reached at (949) 769-3448, kristin@ balancedlegalplanning.com or www.balancedlegalplanning. com.

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Charitable Gifts with Strings Attached JERAMIE FORTENBERRY, JD, LLM (TAXATION) For philanthropic clients, year-end tax planning often involves charitable contributions. As you’re reading this in January, your clients’ 2015 planning is, for the most part, behind them. But getting an early start on philanthropic planning for 2016 can mean the difference between success and failure for your clients.

Many donors have specific purposes in mind when they make charitable contributions. They want to ensure that the contribution achieves their charitable goals. To this end, they may want to restrict the gift or earmark it for a specific purpose. Although these restrictions are usually well-intended, an impermissible restriction could risk the client’s charitable deduction. To protect against this, any restrictions should be designed with deductibility requirements in mind.

This article looks at three common pitfalls: use restrictions, reversionary interests, and deferred gifts. It concludes with drafting suggestions to help attorneys draft gift agreements that ensure the client’s wishes will be respected while protecting the client’s tax deduction.

USE RESTRICTIONS Donors may only deduct contributions made “to or for the use of” a charity.1 If a donor restricts a contribution for a specific use, the restriction must not prevent the charity “from freely and effectively employing the transferred assets, or the income derived therefrom, in furtherance of its exempt purposes.”2 PAGE

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Any condition that restricts the charity’s use of the assets for its exempt purposes will cause the gift to be nondeductible.

Whether a restricted gift will be deductible depends on the nature of the restriction in light of the charity’s mission. One example in the Treasury Regulations3 involves a gift of land to a city government for use as a public park. The regulations provide that the restricted gift is deductible if two conditions are satisfied.

First, the donee must intend to use land as a park on the date of the gift. Second, the possibility that the donee will not use the land for a public park must be “so remote as to be negligible.”4 If these conditions are satisfied, the donor may deduct the value of the gift notwithstanding the use restriction.

REVERSIONARY INTERESTS What happens if the charity doesn’t use the property for the purpose the donor intended? Some donors may want to include reverter clauses that transfer the property back to the donor if the use of the property violates the gift agreement. In this situation, the reverter clause will cause the gift to be nondeductible unless the possibility of reversion is “so remote as to be negligible.”5 The phrase “so remote as to be negligible” has been defined by the Tax Court to mean “so highly improbable and remote as to be lacking in reason and substance” and a “chance which persons generally would disregard as so highly improbable

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that it might be ignored with reasonable safety in undertaking a serious business transaction.”6 Rev. Rul. 2003-28, 2003-1 C.B. 594 is also instructive.

In that ruling, a donor transferred a patent to a university on the condition that a faculty member remain on faculty during the patent’s remaining life of 15 years.

The IRS found that this restriction was too onerous.

Because the chance that the faculty member might leave the university in a 15-year period was not so remote as to be negligible, the charitable deduction was disallowed.

DEFERRED GIFTS A deferred gift can occur if the transfer of the contribution depends on a future act. Unless the likelihood that the future condition will not occur is so remote as to be negligible, the charitable deduction may be deferred until the condition occurs.

In Rev. Rul. 79-249, 1979-2 C.B. 104, the donor made a gift to a public board of education. The gift included a reversionary clause that provided that the funds would be returned to donor if there were not sufficient funds to complete the building. The IRS ruled that, absent certainty that there were adequate funds to complete the building, the possibility that the donation would be returned to the donor was not so remote as to be negligible. As a result, the donor’s charitable deduction was deferred until there were adequate funds to construct the building.

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the donor, a condition specified in the agreement, or changes approved by a court that would best enable the charity to fulfill its exempt purpose.

When the gift involves a use restriction, the gift agreement should specifically identify the charity’s exempt purpose and explain how the restricted gift furthers the charity’s exempt purpose. The agreement should also require the charity to monitor the use of the donation to ensure that it accords with the donor’s intent.

Because of the ambiguity in the phrase “so remote as to be negligible,” almost any gift with a reverter clause leaves the door open to a challenge by the IRS. Reverter clauses should be used as a last resort and only in situations where there is a very strong chance that there will be no reversion.

Because reverter clauses should only be used when there is virtually no chance that they will be needed, one might question whether it ever makes sense to include them. A better approach may be to provide an alternative charitable donation of the property instead of returning it to the donor. Depending on the circumstances, the gift agreement could provide that, if the condition occurs, the property could be used by the charity for a different use or transferred to another exempt organization.

ENDNOTES 1 Internal Revenue Code (“Code”) §170.

2 Treas. Reg. §1.507-2(a)(8).

DRAFTING CONSIDERATIONS Gift agreements should be drafted with these rules in mind. Both the donor and the charity must have a clear understanding of the terms of the gift agreement before they sign it. Any restrictions or conditions should be clearly described. Any ambiguity is likely to lead to future disputes between the parties. The gift agreement should also clearly specify the consequences of any use of the donated property that violates a use restriction or the failure of any condition to occur.

3 Treas. Reg. §1.170A-1(e).

4 Id. 5 Treas. Reg. §20.2055-2(b).

6 Briggs v. Comm’r, 72 T.C. 646, 656-657 (1979).

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Thinking More Deeply on Trust Advisors and Protectors MATTHEW T. MCCLINTOCK, JD VICE PRESIDENT, EDUCATION

The use of trust advisors and protectors in the domestic trusts & estates context has increased dramatically over the past couple of decades. Originally found in offshore asset protection trusts, the concept of granting discrete powers to a non-trustee power holder has introduced a great deal of flexibility in trust design and administration.

The popularity of the use of trust advisors and protectors is reflected in the growing body of statutory recognition, now extending to several states with directed trust statutes on the books. Statutory recognition is sure to grow in the years to come as states consider adopting provisions from the Uniform Trust Code. Section 808(b) of the UTC contemplates the role of the trust protector or trust advisor as authorized third parties who may be empowered by a trust settlor to hold and exercise certain powers.

Though statutory law is growing, there is scant case law to guide practitioners through some of the more challenging issues concerning trust advisors and protectors. Moreover, scholars disagree – sometimes stringently – on the propriety of using trust protectors beyond the offshore asset protection trust context.

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Central to the argument is whether a trust protector is a fiduciary: Always? Never? Sometimes? And to what extent does terminology matter? Is a trust “protector” different than a trust “advisor”, or are we drawing a distinction without a difference?

These are indeed important issues and we must not wait for legislatures or the courts to color in all the lines for us. Creative and thoughtful trusts & estates attorneys should lead the way in defining and clarifying key elements of the use of protectors and advisors. Some of the essential questions to be considered as the practice of using trust protectors continues to develop include: •

What powers should the protector hold? Protectors often hold a series of “negative” powers, authorizing the protector to negate actions taken by another party, and “affirmative” powers, authorizing the protector to act proactively to either affirm the actions of another, or make a change to the trust or its administration.

•

Does the protector owe a duty? If so, to whom is that duty owed? If not, are there any ramifications

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if the protector’s action or failure to act causes harm?

•

Is the protector a fiduciary? Is the answer to that question fixed, or does it depend on other factors?

•

How should a trust protector’s compensation be computed and paid?

For purposes of this article we will focus only on these few issues, though others merit further examination as well. But chief among the issues is whether the protector is or is not a fiduciary, so we will focus our efforts there. Many of the other important questions concerning advisors and protectors flow from this pivotal issue so resolving it begins to pave the way toward clarity on other issues.

I submit that the nature of the power held should determine the capacity with which that power is held, and thus, should define the level of care the protector should be expected to satisfy in holding, exercising, or refusing to exercise a power. And while domestic law provides some guidance, there are many gaps and inconsistencies. We, as learned professionals, must take the lead and guide the law, rather than wait for courts and legislators to fill in blanks based on bad cases and lack of critical thought.

U.S. LAW AND TRUST ADVISORS AND PROTECTORS At least 22 states statutorily recognize the existence of trust advisors or protectors. Of those, 17 require that the powers the advisor or protector possesses be specifically enumerated within the governing will or trust instrument. Some of the states’ laws are fairly comprehensive, but many leave wide gaps and little clarification about the scope and limits of the protector’s role, the nature of permissible powers, and how the protector interacts with other trust parties.

Many states swept in trust protector provisions as they adopted the Uniform Trust Code, as §808 of the UTC contemplates protectors as third parties holding powers over the trust.

Section 808 of the Uniform Trust Code states, in pertinent part: SECTION 808. POWERS TO DIRECT. (b) If the terms of a trust confer upon a person other

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than the settlor of a revocable trust power to direct certain actions of the trustee, the trustee shall act in accordance with an exercise of the power unless the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust. (c) The terms of a trust may confer upon a trustee or other person a power to direct the modification or termination of the trust. (d) A person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary who, as such, is required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries. The holder of a power to direct is liable for any loss that results from breach of a fiduciary duty.

Note that the text of §808 does not contain any specific reference to trust protectors in the substantive provision of the statute. For clarity, we must consider the comments to the draft §808 that provide in pertinent part: …Subsections (b)-(d) ratify the use of trust protectors and advisers. Subsections (b) and (d) are based in part on Restatement (Second) of Trusts § 185 (1959). Subsection (c) is similar to Restatement (Third) of Trusts § 64(2) (Tentative Draft No. 3, approved 2001). “Advisers” have long been used for certain trustee functions, such as the power to direct investments or manage a closely-held business.

“Trust protector,” a term largely associated with offshore trust practice, is more recent and usually connotes the grant of greater powers, sometimes including the power to amend or terminate the trust.

Subsection (c) ratifies the recent trend to grant third persons such broader powers.

The comments also provide that the provisions set forth under §808 should be alterable by the settlor within the trust agreement. So while the provisions of the model act state that the holder of a power to direct is “presumptively a fiduciary” and that the trustee “shall act in accordance” with an exercise of a protector’s power, there is nothing in the model act that would prevent a settlor from closely tailoring the roles and powers of those power holders.

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COMMON POWERS GRANTED TO TRUST PROTECTORS When it comes to defining trust protector powers, creativity reigns. Surely, the purpose of the trust protector is to provide flexibility for a trust that is likely to last for many years beyond the death of the settlor, accommodating the inevitable changes that will occur to state trust law, state and federal tax laws, and the unique circumstances the beneficiaries will face while the trust is under administration.

While it is likely impossible to collect and classify the whole world of powers that may be given to protectors, a starting point is to acknowledge that certain powers are affirmative – allowing a protector to take some action – and other powers are negative – empowering a protector to prohibit or undo actions taken by the trustee or another party to the trust.

Unfortunately the states that have enacted protector provisions do not usually provide even this level of clarity concerning protectors’ powers.

Even more confounding is the disparity with which the states determine whether the protector is or is not a fiduciary. The inconsistencies among the states have fueled much scholarly debate about whether the protector is always a fiduciary, never a fiduciary, or somewhere in between. As we unpack this confusion it is possible to consider a broader framework into which those powers should fall, and within which we can determine whether a power should be held in a fiduciary or nonfiduciary capacity.

INCONSISTENT STATE LAW WEAVES A JOSEPH’S CLOAK OF CONFUSION When we look to the body of state law concerning trust protector powers we find little consensus about whether the protector is or is not a fiduciary, and whether or not the settlor can modify that classification in the governing instrument. For attorneys practicing in states that have protector statutes on the books, it is imperative that the practitioner be aware of the scope and limits of prevailing protector laws and the degree to which the powers and duties can be shaped by drafting.1 For instance, several states specify that the protector (or in some cases, the trust “advisor”) is a fiduciary PAGE

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by default, but that the governing instrument can change that standard. This is also the default provision endorsed in the comments to §808 of the Uniform Trust Code.

There is, however, a handful of states that have started thinking more deeply on the nature of protector powers and have begun tailoring the protector’s fiduciary or nonfiduciary capacity to the nature of the power granted. These states provide that the protector is a fiduciary when he or she holds “trustee-like” powers.

It is here that we begin to find a useful framework within which we can organize protectors’ powers.

For example: In Idaho, the trust advisor is a fiduciary when exercising investment powers unless the governing instrument provides otherwise.2 In Wisconsin, the protector is a fiduciary when exercising investment or distribution powers, when construing the trust at the request of the trustee, or when resolving disputes among beneficiaries unless the governing instrument specifies to the contrary.

In all other circumstances the protector holds power in a nonfiduciary capacity (unless again, the document specifies otherwise).3 South Dakota takes a similar approach by stating that the trust advisor is a fiduciary when given authority to direct, consent to, or disapprove a fiduciary’s investment decisions unless the document states otherwise.4 The powers of the trust protector may be exercised or not exercised in the protector’s “sole and absolute discretion”, suggesting that there is no fiduciary duty that attaches to the protector. Presumably the document could specify to the contrary.5

U.S. CASE LAW AND THE ROLE OF THE TRUST ADVISOR & PROTECTOR While it is true that we generally inherited the use of trust advisors and protectors from the world of offshore asset protection trust planning, it would be inaccurate to say that domestic case law is silent on the issue. Several cases6 under U.S. law that referenced the use of a non-trustee “trust advisor”, examined the advisor’s role and determined the nature with which the advisor held power. All of those early cases found

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that the trust advisor is a fiduciary, because in each instance the advisor held powers that impacted the manner in which the trustee exercised its fiduciary duty over the trust.

Drawing from the handful of states that have begun to distinguish between types of powers – a paradigm first set forth under Crocker7 – we can begin to further build a framework within which we can organize protectors’ powers, and identify the nature with which they hold those powers.

Aside from the categories of affirmative and negative protector powers, trust protector powers can be further classified as “trustee-like” or “court-like.” There is also a group of commonly-granted powers that may not neatly fit into this classification, which likely require additional thought and careful drafting.

TRUSTEE-LIKE POWERS Some powers just look inherently like the kind of powers that a trustee might hold, which impact the regular operations and management of the trust. In fact, if the trust did not provide for a trust advisor or protector, these are the kinds of powers that might otherwise be held by a trustee. These may include the power to:

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these powers should not be subject to that same standard when held and exercisable by another party.

Thus, when the trust advisor or protector holds trustee-like powers, they should generally be held to a fiduciary standard.

COURT-LIKE POWERS Another collection of powers does not look at all like trustee powers, but rather appears to be extrajudicial in nature. These powers are often granted for the specific purpose of keeping trust administration out of the court, allowing a knowledgeable and independent third party to exercise powers that would otherwise be conferred to the court. These may include the power to: •

Resolve disputes among the beneficiaries concerning the trust;

•

Modify trust provisions through an amendment power;

•

Grant, revoke, or modify powers of appointment (as an extension of the amendment power);

•

Add or delete beneficiaries;

•

Change the nature of a beneficial interest or change a distribution standard, such as from an ascertainable “HEMS” standard to a purely discretionary distribution power;

•

Advise or manage the exercise of discretionary distribution authority by a corporate trustee;

•

Advise the trustee concerning the timing and nature of distributions from the trust;

•

•

Advise the trustee in making allocations of capital gains to income, or veto those decisions if made by the trustee;

Prevent a beneficiary from assigning his or her interest in the trust;

•

Construe trust terms to resolve ambiguity;

•

Terminate the trust;

Advise the trustee in selling assets, or vetoing sales if necessary;

•

Remove or replace the trustee;

•

Approve the trustee’s compensation; and

•

Direct or guide the trustee concerning investment decisions;

•

Approve trustee accountings.

•

Supervise other actions of the trustee;

•

Break a deadlock among trustees;

•

Manage a trust-owned business; and

•

Vote stock shares owned by the trust.

•

Powers like these listed above tend to look and feel like trustee powers. When they’re held by the trustee, obviously they’re exercisable subject to a fiduciary’s standard of care. It seems implausible to argue that

These kinds of powers do not directly impact the dayto-day administration of the trust and would generally be exercised only in very limited circumstances. In fact, these are the kinds of issues that historically get referred to the court for resolution. It stands to reason that a third party holding these powers should not be held to a fiduciary standard, but would be treated as an independent arbiter to carry out the probable intent as expressed in the document – just as a court might do under the doctrine of equitable deviation.

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OTHER SPECIAL POWERS There is a third category of powers that may not neatly fit into the “trustee-like” or “court-like” distinction. These are powers that may be held by a trustee (fiduciary) or by a court (nonfiduciary), and so the trust instrument should specify accordingly. These include the power to: •

Designate the succession of trustees (for instance, where the trust is silent);

•

Change the governing law of the trust;

•

Change the trust situs; and

•

Provide nonbinding guidance or advice to the trustee.

TRUST “ADVISOR” OR TRUST “PROTECTOR”?

As the use of trust protectors and trust advisors has expanded, so has the discussion about whether these terms mean different things, or whether they constitute a distinction without a difference. Even some statutes equate the terms, further frustrating our ability to provide some clarity.

As discussed above, early U.S. cases consistently found trust “advisors” to be fiduciaries because their powers were “quasi-trustee” in nature. If advisors and protectors are indeed the same thing, then it becomes quite difficult to argue that one should be held to a fiduciary standard while the other is not.

But the terms “trust advisor” and “trust protector” should not be treated synonymously, and it is sloppy and dangerous to do so. If we commit to look closer at the nature of the power granted, perhaps we can begin to draw a true distinction where the law currently does not. And perhaps we should clean up our language a bit to apply a consistent title to a consistent set of powers.

Following the logic of those early cases, and tracking with some of the policies outlined in existing state law, perhaps we could agree on some new definitions:

making authority that impacts the regular administration of a trust. The advisor serves to carry out the settlor’s intent by influencing the exercise of the trustee’s duties under the trust.

The powers given to a trust advisor are thus among the “inherent trustee powers” set forth above. These are the kinds of powers that might otherwise be held by a trustee or perhaps by the settlor or a beneficiary without adverse tax consequences, but that are given to a third party as a check-and-balance for the trustee.

Because of the nexus with the trustee’s role, and because it’s consistent with early U.S. case law, the trust advisor should be a fiduciary. As far as the trust advisor’s compensation is concerned, because the trust advisor’s role is ancillary to the role of the trustee, the advisor should perhaps be compensated on a standing retainer or paid in a manner similar to a trustee.

TRUST “PROTECTORS” A trust protector should be a nonadverse individual who holds power or decision-making authority over a trust, and who serves to carry out the settlor’s intent through the interpretation and execution of the trust.

The powers given to a trust protector are quasi-judicial in nature. They are powers that would have adverse tax or asset protection consequences if held by the settlor or a beneficiary. The protector may step in when matters must otherwise be referred to a court.

Because the protector’s powers can impact beneficial interests and otherwise cause significant changes to the tax treatment of the trust, the protector must not be related or subordinate to the grantor, a beneficiary, or to the party who may remove and replace the protector.

Because the trust protector looks like a court, the protector should not be a fiduciary. Because the trust protector is a quasi-judicial power holder, the protector should only serve – and perhaps be compensated – only upon a triggering event requiring action.

TRUST “ADVISORS”

SHOULD THE PROTECTOR AND TRUST ADVISOR BE THE SAME INDIVIDUAL?

A trust advisor is an appointed individual other than the trustee who holds certain powers or decision-

It may be possible for the same individual to serve both as trust advisor and as trust protector. As “advisor,” that

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individual is bound to a fiduciary standard when holding the advisor’s powers. As “protector,” the individual is not held to a fiduciary standard and acts in the best interests of justice in exercising his or her powers.

Ideally, however, these should be different individuals. One would serve as trust advisor – almost a “super trustee” of sorts – while another would serve as needed in a quasi-judicial capacity. Although this may seem cumbersome, it would appear to provide a cleaner framework in which trust administration can operate, clearly delineating between powers that are fiduciary in nature and those that are not (and likely with different levels of indemnification).

Moreover, if the trust advisor serves continually (like a trustee) and the protector serves only sporadically (like a court), then it stands to reason that these distinct roles – with different powers and capacities – would be held by different parties.

TAILOR THE STANDARD TO THE POWER Because state law is confused at best, we should take the classification of trust protector powers, consider whether the power looks like a trustee’s power or like a court’s power, and then assign the fiduciary or nonfiduciary standard to each of those powers accordingly.

For example, the administrative, trustee-like powers that most directly impact the day-to-day operations of the trust and how the trustee carries out its duties perhaps should be held to a fiduciary standard. After all, if the trust protector can direct investments – and if the trustee is compelled to follow the protector’s direction – who should bear the impact of that decision? Surely the trustee is exonerated from liability if he is required to follow the protector’s guidance. To not expect the protector to be bound to a fiduciary standard in directing those investments is to expose the beneficiaries to capricious investment decisions without recourse.

Other powers appear to defy the ability to be held to

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a fiduciary standard. For example, if a trust protector were to shift a beneficial interest from one beneficiary to another, how could she ever do so while honoring the fiduciary duty of impartiality among the beneficiaries? And if the protector must resolve disputes among beneficiaries, doing so would necessarily favor one beneficiary over another, again frustrating the very nature of the fiduciary’s duties of loyalty and impartiality.

Legislation and case law are a rear view mirror, not a windshield. They only show us where we’ve been, and then only to the extent a court had to resolve a problem or a legislative body got a little creative. Laws do not tell us where we should be going to drive the state of the legal industry forward. That is the role of us as professionals in the daily business of the industry.

The current laws loosely defining the role of the trust protector or trust advisor cry out for clarity that trusts & estates attorneys must provide through careful thought, drafting, and administration of clients’ trusts.

ENDNOTES 1 For an excellent discussion on these issues, please see: Kathleen R. Sherby & Justin T. Flasch: The Nature and Effective Use of “Trust Advisors” and “Trust Protectors” as Third Party Decision Makers (ALI-CLE Seminar Resource, March 24, 2015) 2 Idaho Code Ann. §15-7-501(4). Although Idaho distinguishes between advisors and protectors, its Code is silent as to the capacity of protectors.

3 Wis. Stat. §701.0818(2)(b) 4 S.D. Codified Laws §55-1B-4.

5 S.D. Codified Laws §55-1B-6 6 See, e.g., Lewis v. Hanson (DE 1957): advisor is a fiduciary, analogous to a “quasi-trustee”; Harrington v. Bishop Trust (HI 1959): advisor is bound to fiduciary duty when voting stock; Crocker-Citizens Nat’l Bank v. Younger (CA1971): rights & duties of trustees generally apply to others who hold “trustee-like” powers; and Stuart v.

Wilmington Trust (DE 1984): the power to consent to the trustee’s exercise of a power is fiduciary in nature. As a counterpoint to these cases, compare Rob’t T. McLean Irrevocable Trust v. Ponder (MO 2013) in which the court found that where the trust did not provide any requirement for the trust protector to supervise the trustee none would be implied by the court.

7 Crocker-Citizens Nat’l Bank v. Younger (CA1971)

Wealth Docx includes extensive trust protector drafting provisions to help attorneys consider and appropriately draft protector provisions in various estate planning documents. As with any document drafting solution, it is imperative that the drafting attorney carefully reviews – and when appropriate, modifies – the assembled document to ensure that the drafted solution both complies with the attorney’s best counsel and represents the client’s desires For more information on Wealth Docx and trust protector drafting, contact our practice consultants at (888) 659-4069 #819 PAGE

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Uniform Protected Series Act: Coming Soon?

JENNIFER L. VILLIER, JD PAGE

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Series LLCs have been called the next generation of pass-through entities, gaining in popularity and use as states continue to authorize them. The lack of state uniformity in the treatment and acceptance of series LLCs has lead more conservative attorneys, advisors, and clients to avoid them, believing that the uncertainties and potential risks associated with series LLCs outweigh their perceived benefits.

The National Conference of Commissioners on Uniform State Laws (“NCCUSL”) has been hard at work producing multiple drafts of a uniform law for series LLCs. While the drafters’ comments on earlier drafts left open questions regarding whether such a statute would ever be enacted,1 the most recent draft evokes more confidence that a uniform law is indeed forthcoming. This article provides an overview of series LLCs, highlighting some of the uncertainties associated with their use, and discusses the status of the NCCUSL’s efforts in adopting a uniform law to provide increased clarity and consistency in the use and legal treatment of series LLCs.

WHAT IS A SERIES LLC? A series LLC is a limited liability company with internal “series” or “cells,” each of which may have separate members, managers, assets and liabilities, business purposes or investment objectives. The assets of each series are shielded from the liabilities of the other series and the LLC itself. In other words, each protected series2 has its own separate veil of limited liability protection.

Initially created under Delaware law to serve as business structures for mutual funds, series LLCs are now being used in the context of other business enterprises for purposes of asset protection. They often appeal to those with different lines of business, different categories of assets, or different types of property they wish to manage and operate separately, under the umbrella of a “master” LLC. For example, a real estate developer may establish a series LLC to segregate each property within its own protected series.

Similarly, a taxi company may utilize a series LLC to keep each taxi in a separate, protected series, segregating it from the liabilities associated with any other taxi in the fleet. Series LLCs are also being used for holding companies, which are often used in asset

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protection strategies to hold valuable assets separate from the operating company, which then leases the holding company’s assets. Estate planners also commonly use series LLCs to segregate assets for different beneficiaries.

WHAT UNCERTAINTIES SURROUND SERIES LLCS? As one of the newest forms of business entity, series LLCs lack the benefit of some of the more established types of business entities that offer guidance through well-developed statutes and case law. Among the uncertainties with respect to series LLCs that have troubled commentators and practitioners alike are the following:

CHOICE OF LAW If a series LLC is sued by a third party in a state that does not authorize the formation of series LLCs, then it is possible that the law of that state would be applied. It is not known whether that state would respect the liability shield of the series LLC structure.

If the limited liability among the series were not respected, then a lawsuit could potentially put the assets of all series and the master LLC at risk.

BANKRUPTCY The U.S. Bankruptcy Code does not recognize series LLCs, thus, it is not possible to say with certainty how series LLCs would be treated in the event of bankruptcy. Likewise, it is not clear whether a single protected series in a series LLC can file for bankruptcy in its individual capacity, and if so, whether a bankruptcy court would protect the assets of a non-filing protected series from the assets of the protected series that filed for bankruptcy.

Some have suggested that a substantive consolidation analysis is appropriate in a series LLC context.

Substantive consolidation is a bankruptcy concept similar to “piercing the corporate veil” and involves the consolidation of the assets and liabilities of the debtor’s bankruptcy estate with the assets and liabilities of another entity or group of entities. The risk of substantive consolidation further supports the need PAGE

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to avoid overlapping ownership of assets among the series in the LLC and to make the segregation of assets and business lines – and where applicable, membership interests – clear in any agreements between an individual series and its creditors.

CORPORATE GOVERNANCE The records and bank accounts of each protected series must be separately maintained. But whether there can be any overlap among the protected series in the context of daily operations is untested in court.

For example, would sharing insurance coverage, training programs, or administrative support services be permissible? How about inadequate capitalization of one protected series compared to another? What if there is overlap in ownership or management of protected series? Would any of these circumstances blur the lines of separation among the protected series and lead to piercing of the veil? Given the lack of case law, it is not possible to say whether series LLCs are under any greater risk of having their veil of limited liability pierced than any other related LLCs.

TAX TREATMENT Notwithstanding IRS Letter Ruling 2008030043 and Proposed Regulations Section 301.7701-14, important tax questions remain unanswered. No formal guidance exists on employment taxes or employee benefits; therefore, a protected series with employees has little way to determine whether it can offer employee benefit plans or how to comply with the rules applicable to those plans.5

Furthermore, the Proposed Regulations are silent as to whether the series LLC itself is recognized as a separate entity for tax purposes if it has no assets and engages in no activities. Unfortunately, there is no indication of when the Proposed Regulations, published in 2010, will be finalized. Until that time, protected series in a series LLC are generally treated as a separate legal entity that determines its tax classification under the “check-the-box” rules.

State taxation of series LLCs is even less clear than federal taxation. A number of states indicate that they will tax each series consistent with its federal tax classification.6 Other states provide for default partPAGE

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nership taxation of series LLCs.7 Some states provide little or no guidance on taxation of series LLCs. The California Franchise Tax Board treats each series within a series LLC as a separate entity, subjecting each to a minimum $800 annual franchise tax. It remains to be seen whether other states that impose annual franchise taxes or business privilege taxes on LLCs will follow California’s lead and impose the tax on each individual series.

SECURED TRANSACTIONS With respect to secured financing transactions that are governed by Article 9 of the Uniform Commercial Code, there is uncertainty with respect to the proper identification of the debtor on a financing statement.

Identifying the type and location of a debtor is required in order to know where to file a financing statement and what name to list on the financing statement. The individual series of series LLCs formed in most states need not make a separate filing with the state at formation. As a result, those series cannot be “registered organizations” under Article 9.

In most states with series LLC legislation, the individual series are not separate and distinct entities, and therefore those states will not issue good standing certificates for individual entities. Illinois provides an exception under its statute, providing that “each series with limited liability may, in its own name, contract, hold title to assets, grant security interests, sue and be sued and otherwise conduct business and exercise the powers of a limited liability company under this Act.”8 Kansas also permits (but does not require) an individual series to be treated as a separate legal entity.9 Thus, while an individual series may be able to hold assets and grant security interests pursuant to relevant state law, it is not clear if the individual series can be a “debtor” under the UCC.

WHICH STATES HAVE AUTHORIZED SERIES LLCS? Presently, there are 15 states with series LLC legislation: Alabama, Delaware, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, North Dakota, Nevada, Oklahoma, Tennessee, Texas, Utah and Wisconsin.

The District of Columbia and Puerto Rico also have

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provisions for series LLCs. California does not authorize Series LLCs, but permits series LLCs formed elsewhere to register as a foreign entity and do business in California as a series LLC, provided such entity pays taxes and fees for each of its protected series.

STATUS OF UNIFORM SERIES LLC ACT The inconsistency in recognition and treatment of series LLCs across the U.S. supports the need for uniform legislation. It has been 19 years since Delaware first authorized series LLCs, and in that time less than one-third of the states have adopted similar legislation. By contrast, within 20 years of Wyoming introducing the nation to the LLC, all 50 states had adopted LLC legislation.

Since the series form of business is also available for limited partnerships and statutory business trusts with characteristics similar to those of series LLCs, the drafters originally referred to the model act as the “Series of Unincorporated Business Entities Act.” The first draft was published in September, 2013; the second draft followed in February, 2014; and the third draft (which the committee noted to be a complete overhaul of earlier drafts) was made available in November, 2014. In its comments to the third draft, the committee questioned the need for series LLCs, stating that “the special advantages of protected series remain obscure.” Thus, we entered 2015 with lingering doubts about whether uniform series LLC legislation would ever exist.

Nonetheless, 2015 was a year of progress. The committee produced yet another draft in March, another in July, and the most recent draft was released in November. The latest draft makes significant changes to earlier drafts, but seems to take a more focused and streamlined approach. Some of the key elements of the November 2015 draft include the following: More Limited Scope. The draft is given a proposed new name, the Uniform Protected Series Act (“UPSA”), along with a scope restricted to limited liability companies. Previously, it had been called the Series of Unincorporated Business Entities Act, as its scope was more expansive, encompassing series of limited partnerships and statutory business trusts.

Compatibility with State LLC Legislation. The draft is intended to dovetail with the LLC statute of each en-

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acting state, regardless of whether the state has previously enacted the Uniform Limited Liability Company Act. In other words, definitions and provisions will cross-reference to the state’s LLC act to ensure consistency.

Possible Conversion to an Article in Existing State LLC Acts. One approach the drafters are considering is to convert the UPSA to an article to be inserted into the LLC act of each enacting state. This would eliminate the need to cross-reference definitions from the relevant LLC act.

Limited Liability Veil. No existing series LLC legislation addresses the issue of piercing the veil. The draft UPSA expressly acknowledges and makes applicable veil piercing in the series LLC context. In other words, it confirms that the same rules of law and equity apply to hold members of a series LLC vicariously liable for the company’s debts and to hold members associated with a protected series vicariously liable for the protected series’ debts.

Asset Protection. Most existing series statutes permit an LLC to establish a protected series without a public filing, provided the LLC’s publicly filed formation document indicates that it may have protected series.

Historically, for an entity to acquire any type of liability shield, a public filing had to be made with a government office. Therefore, the draft UPSA expressly requires a public filing be made in order to establish a protected series and its “horizontal” liability shield.

Affiliate Liability. No existing series LLC statute addresses the issue of one series being held liable for the debts of another. The draft UPSA makes the rules of “affiliate liability” applicable among a series LLC and its protected series. Generally, in the absence of affiliate liability, assets owned by one entity are not subject to the enforcement of claims by creditors of any other entity.

Association Requirement. The draft UPSA provides additional creditor protection against the so-called “shell game.” The draft provides that even if there is no affiliate liability, an asset owned by a protected series is available to creditors of the series LLC or another protected series unless the protected series has complied with strict record-keeping requirements, thereby “associating” the asset with the protected series. In other words, an asset may be owned by, but

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not associated with, a given protected series, in which case the asset is up for grabs by creditors of any other protected series or the company.

TAKEAWAYS Although recognized by an increasing number of states, series LLCs remain a largely unfamiliar entity outside the investment fund context. Along with the finalization of the IRS’s 2010 Proposed Regulations, the adoption of a uniform act would likely lead to more widespread acceptance, consistency and use of series LLCs throughout the United States. Substantial progress on the uniform act has been made over the past year, after three years of the drafting committee seemingly taking two steps forward and one step back. It remains to be seen whether the NCCUSL will unveil a final draft and authorize the uniform act in 2016. Nonetheless, attorneys are likely to experience in uptick in clients interested in series LLCs as the entity matures and gains acceptance across the United States.

REFERENCES Batey, Doug, “NCCUSL Starts Work on a Uniform Series LLC Act – Many Questions Remain” (November 25, 2014) www.llclawmonitor. com/2014/11/articles Brucia, Greg, Esq., Series LLCs: Possibilities and Pitfalls (February, 2015) Griffith, Cara, “Series LLCs: The Next Generation of Pass-through Entities?” www.forbes.com/sites/taxanalysts/2015/02/2015 NCCUSL 2015 Annual Meeting Issues Memo (June 8, 2015)

Series LLCs: Wise Option or Risky Strategy (CT Corp. Staff, August 11, 2015) Series of Unincorporated Business Entities Act (Drafts 2013-15), National Conference of Commissioners on Uniform State Laws www.uniformlaws.org

ENDNOTES 1 See Series of Unincorporated Business Entities Act, draft November, 2014, wherein the committee questioned the need for series LLCs, stating that “the special advantages of protected series remain obscure.”

2 Note that the term “protected series” is the term consistently used to refer to these “units” in the NCCUSL committee drafts. This article uses the terms “protected series” and “series” interchangeably.

3 IRS Letter Ruling 200803004 provides that the tax classification of separate cells depends on the structure of each separate cell.

4 Proposed Regulations section 301.7701-1 provides that the tax classification of series LLCs and each of their protected series is determined by general tax principles rather than the laws of the state of formation.

5 The preamble to the proposed regulations provides that a series maintaining an employee benefit plan is subject to the aggregation rules and employee leasing rules of Internal Revenue Code §414.

The analysis, then, that should apply to determine whether any series is properly maintaining an employee benefit plan is the same analysis that applies to any entity maintaining an employee benefit plan that is under common control with a number of other entities.

6 See, e.g., Florida Technical Assistance Advisement, No. 02-M009 (Nov. 27, 2002).

7 See, e.g., New York Advisory Opinion No. TSB-A-98(8)I, New York Department of Taxation and Finance (Sept. 4, 1998).

8 805 ILCS 108 §37-40(b) 9 See Kan. Stat. Ann. §17-76, 143(b)

Both the Business Docx and the Wealth Docx Operating Agreements enable users to form series LLCs. In Business Docx, the series LLC option is available only in the full version of the Operating Agreement. In Wealth Docx, the series LLC option is available in the LLC Operating Agreement (updated). The relevant interview questions can be found in the “Basic Information about the LLC Structure and Design” tab.

WealthCounsel is committed to staying abreast of the legislative, regulatory and judicial landscape pertaining to series LLCs, and relevant updates in the law will be reflected in future releases of Business Docx and Wealth Docx. WealthCounsel also strives to provide education and community resources to help you determine whether a series LLC structure is right for your clients.

For more information on Wealth Docx and trust protector drafting, contact our practice consultants at (888) 659-4069 #819

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“ Business Docx™ does such a great job of educating that I can tell a client: here’s your document, here’s how it works, here’s why we did it this way

HELP YOUR BUSINESS CLIENTS TAKE CARE OF BUSINESS.

and here’s why you’re going to enjoy working with me.”

- SARAH OSTAHOWSKI, JD MEMBER SINCE 2011

Business Docx™ has the communication tools you need.

Small business clients need your help keeping track of their legal and tax priorities.

Business Docx™, from WealthCounsel, is the drafting system estate planners and small business attorneys turn to for not only superior document drafting, but also a comprehensive suite of client communication tools and guidance. Because the more connected you are with your clients, the more engaged they are and the deeper your relationship becomes. And that’s how smart practices grow.

Let our practice consultants give you a personal demonstration of what makes Business Docx™ so powerful. Contact WealthCounsel today: CALL (888) 659-4069 #819 EMAIL info@wealthcounsel.com OR VISIT wealthcounsel.com

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Income Taxation of Estates and Trusts GREGORY HERMAN-GIDDENS, JD, LLM, TEP, CFPÂŽ, SAMANTHA REICHLE, JD, AND KATIE H. MUHLENKAMP, JD Estate planning practitioners will find that a good working knowledge of fiduciary income taxation is not only vital in assisting personal representatives and trustees in the administration of estates and trusts, but also is key to providing better and more comprehensive counseling and drafting during the planning process.

WealthCounsel’s August 18, 2015 Thought Leader Webinar, Fiduciary Income Tax Considerations in Drafting Trusts, focused on the latter, while this article will provide a brief overview of the basic rules from an administration standpoint.

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Estates and non-grantor trusts are separate taxable entities from the decedent or grantor for federal income tax purposes. Under the fiduciary income tax provisions of Subchapter J of the Internal Revenue Code, income generated by or attributed to the estate or trust is taxed only once, either to the estate or trust that receives the income, or to the beneficiary to whom the income is distributed during the entity’s taxable year. Thus, while estate or trust gross income is calculated in a similar manner as for individuals, estates and trusts are allowed an income distribution deduction which operates to reduce the income taxed to the entity.

BASIC TYPES OF TRUSTS FOR INCOME TAX PURPOSES AND FILING REQUIREMENTS GRANTOR OR NON-GRANTOR Trusts are classified as either grantor or non-grantor trusts. In the case of grantor trusts, income is taxed to

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the grantor during his or her lifetime and reported on the grantor’s Form 1040 (“U.S. Individual Income Tax Return”). A trust is considered to be a grantor trust when the grantor retains certain rights in the trust and trust property, such as a right to continuing dominion, control, or enjoyment of the trust property, a right to revoke the trust, or a right to receive income from the trust property. See IRC Sections 671-678.

In contrast, non-grantor trusts are considered separate taxable entities such that the trust income is taxed to the trust, except to the extent that distributions are made to trust beneficiaries. Ordinary income earned by a non-grantor trust that is distributed to beneficiaries is taxed to the beneficiaries to the extent of the entity’s distributable net income. Income that is not distributed, but instead held in the trust, is subject to taxation in the trust at the federal level and, likely, in one or more states. Non-grantor trusts are required to file a fiduciary income tax return, Form 1041 (“U.S. Income Tax Return for Estates and Trusts”) if the trust has (a) any taxable income for the tax year, (b) gross income of $600 or more, regardless of taxable income, or (c) a non-resident alien beneficiary.

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SIMPLE OR COMPLEX Non-grantor trusts may also be classified as simple or complex. Simple trusts are trusts in which (a) all income must be distributed currently, (b) no principal is distributed currently, and (c) trust funds may not be paid, permanently set aside, or used for charitable purposes. Complex trusts are trusts that do not meet the requirements for a simple trust. A trust may qualify as a simple trust one year and a complex trust another year, depending on the circumstances under which income and principal distributions are made from the trust. The practical difference in return preparation is that the annual income exemption for simple trusts is greater than that for complex trusts.

CHOOSING A TAXABLE YEAR Trusts generally are required to report income on a calendar year basis. Just as with individual income tax returns, the Form 1041 is due April 15. A fiduciary may request a five-month extension to file the federal return by filing a Form 7004 (“Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns”). Note that this is a five month extension rather than the six month extension offered for individual filers. An extension to file the return does not provide an extension to pay taxes, and any tax that is believed to be due as of the original due date must be paid at that time in order to avoid applicable penalties and/or interest.

When the grantor of a revocable living trust dies, the taxable year begins on the date of death and ends on December 31, unless an election is made to have the trust taxed as an estate, as discussed below.

FILING REQUIREMENTS FOR ESTATES AND THE SECTION 645 ELECTION Estates are taxed on income that is earned after the decedent’s date of death. The personal representative may choose either a calendar or fiscal year as the taxable year for the estate. If a fiscal year is elected, then the initial return will report income earned from the date of death through the last day of any month that is not more than twelve months after the com-

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mencement date of the taxable year, and the return will be due the fifteenth day of the fourth month after the close of the taxable year. A shorter fiscal year may be advantageous, depending on the timing of certain items of income or deductions.

An election to use a fiscal year must be made on the initial return filed for the estate. A fiduciary income tax return must be filed for a domestic estate that has (a) gross income in excess of $600 for the taxable year or (b) a non-resident alien beneficiary.

TREATING A TRUST AS AN ESTATE FOR INCOME TAX PURPOSES In order to simplify tax administration of trusts and gain certain advantages available only to estates, an election (referred to as the “Section 645 Election”) may be made to treat a “Qualified Revocable Trust” (QRT) as part of a decedent’s estate for fiduciary income tax purposes. A QRT is a domestic or foreign trust that is treated as owned directly by the grantordecedent under the grantor trust rules of IRC Section 676, without regard to IRC Section 672(e) (which attributes the powers or interests of a grantor to the grantor’s spouse); trusts that were revocable by the grantor-decedent during his or her lifetime generally qualify as QRTs. By filing Form 8855 (“Election to Treat a Qualified Revocable Trust as Part of an Estate”) and checking the appropriate box on Form 1041, the executor and trustee may elect to have the QRT treated and taxed as part of the grantor-decedent’s estate for a minimum of two years; typically, the “election period” covers the period of two years following date of death, but may extend to a date that is six months after the date of the final determination of estate tax liability.

If there is no personal representative appointed, then the trustee alone may file the Form 8855 to make the election and should select “estate” as the type of entity on Form 1041.

The Section 645 Election provides many benefits to a fiduciary, allowing the fiduciary to select a fiscal rather than a calendar year for a trust, claim a $600 annual exemption to offset combined trust and estate income, and negate the need to file two separate sets of federal and state returns for an estate and trust.

During the election period, only one set of federal and

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state returns need be filed for the combined estate and trust, with the returns filed under the name and tax identification number of the estate (unless no estate has been opened, in which case the trustee of the QRT files the returns, treating the QRT as an estate).

If the trust is not terminated within the allowable twoyear period, it must revert to a calendar year. If the trust is terminated within that time, a final “zero” return for the trust, using the trust’s EIN, should be filed for the calendar year of termination.

INCOME TAX RATES Fiduciary income tax rates are the same for both estates and trusts. The income tax rates for a 2015 Form 1041 are as follows: TAXABLE INCOME…

TAX RATE…

Over $0, but not over $2,500

15%

Over $2,500, but not over $5,900

$375 + 25% of the amount over $2,500

Over $5,900, but not over $9,050

$1,225 + 28% of the amount over $5,900

Over $8,900, but not over $12,150

$2,068 + 33% of the amount over $9,050

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fied small business stock are taxed at 28%. Estates and trusts are also subject to the Alternative Minimum Tax.

REPORTABLE INCOME As a general rule, income earned by an estate or trust is taxed only once, and in the same manner as it would be taxed to an individual. See IRC Section 641. However, estates and trusts may deduct charitable contributions without any limitation based on adjusted gross income, and may take exemptions that are not pro-rated for shorter tax years or phased out based on income thresholds. The exemption available to an estate is $600, while simple trusts may take a $300 exemption and complex trusts may take a $100 exemption.

BASIS The basis of property in a decedent’s estate or revocable trust is determined by the fair market value of the property on the decedent’s date of death, or if properly elected on the Form 706, the alternate valuation date that falls six months after the date of death.

See IRC Section 1014. Capital assets from a decedent are presumed to have been held for longer than a year and thereby qualify for long-term gain or loss treatment. Property held in an inter vivos trust that is not included in the decedent’s taxable estate does not receive a step-up in basis.

INTEREST AND DIVIDENDS Over $12,300

$3,179.50 + 39.6% of the amount over $12,300

The 2015 tax rate for long-term capital gains and qualified dividends is 15% if the taxable income is less than $12,300, and 20% if greater than $12,300. Estates and trusts are also subject to the 3.8% Net Investment Income Tax once undistributed net income reaches the top rate of 39.6%. Most income reportable by an estate or trust is considered investment income for this purpose. An estate’s unrecaptured Section 1250 gains are taxed at 25%, while gains from the sale or exchange of collectibles and certain shares of quali-

Reportable interest income includes the income generated from bank accounts, money market accounts, certificates of deposit, United States Treasury Bills, Notes and Bonds, credit unions, thrift institutions, mortgages, notes, loans, original issue discount, and REMIC income. Ordinary dividend income is taxed at the same rate as other income, while qualified dividend income, or income received from domestic corporations on common stock and certain qualified foreign corporations traded on recognized United States exchanges, are taxed at a lower rate. If a fiduciary is responsible for operating a business, a Schedule C (“Form 1040 Profit or Loss From Business”) must be

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submitted with the Form 1041; however, the estate or trust will not owe self-employment tax.

OTHER INCOME Trusts and estates must report all income and loss generated from rents, royalties, partnerships, S corporations, other estates and trusts, and REMICs. The same risk and passive activity rules apply as to individuals. The estate or trust is only treated as materially participating in a business if its activities within the business are regular, continuous, and substantial.

Also reported are state income tax refunds, ordinary income receipts from pension plans, profit sharing plans, IRAs and insurance contracts, and installment payments owed during the decedent’s life but paid after death.

EXPENSE DEDUCTIONS Typical deductions allowed for trusts and estates are fiduciary commissions, attorney and return preparer fees, state income taxes, and court fees. Certain ex-

penses, like investment advisory fees, are subject to the 2% floor – only deductible to the extent that they exceed two percent of adjusted gross income.

DNI AND DISTRIBUTIONS TO BENEFICIARIES The greatest difference between a fiduciary tax return and an individual tax return is that the fiduciary takes an income distribution deduction, allowing the entity to deduct the portion of its Distributable Net Income (DNI) that is distributed to beneficiaries. DNI refers to taxable income earned by the entity, increased by tax-exempt interest income, and reduced by allocable expenses (excluding the distribution deduction, annual exemption, and capital losses).

DNI establishes the maximum income distribution deduction an entity is allowed to claim. Distributions carry out income to the beneficiaries to the extent of the estate’s or trust’s DNI; distributions in excess of DNI are treated as non-taxable payments of principal.

Thus, the beneficiaries will pay income tax at their own income tax rates (typically lower than those for an estate or trust) for their proportionate share of taxable income received. The income distributed to beneficiaries retains the same character it had when held by the entity, whether dividend, interest, tax-exempt, or other, and is allocated pro rata among beneficiaries absent a provision in the trust or local law allowing for particular classes of income to be distributed disproportionately to particular beneficiaries. See Reg. 1.652(b)-2 and 3.

Simple trusts, which mandate distribution of all income, require the beneficiary to report all of the mandatory income whether it was actually distributed or not. Complex trusts, which grant the trustee discretion as to income distribution or accumulation, will tax to the beneficiary any income that was mandatory combined with the discretionary income distributions in that taxable year.

SCHEDULE K-1 The Form 1041 will include a Schedule K-1 for each beneficiary who received any DNI; the fiduciary must supply the beneficiary with a copy once the Form 1041 is filed. The beneficiary then reports these amounts PAGE

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on his or her personal income tax return for the beneficiary’s taxable year in which the entity deducts the distribution (in the case of calendar year estates or trusts), or in the beneficiary’s taxable year within which the entity’s taxable year ends (in the case where the beneficiary’s taxable year is calendar year and the entity’s is fiscal year).

SPECIFIC AND CHARITABLE BEQUESTS Usually, distributions will carry out income to the beneficiary to the extent of the distribution, regardless of whether the actual distribution is made up of income or principal. There are two notable exceptions. First, specific bequests of property or specific bequests of a sum of money in not more than three installments do not carry out DNI. In such a case, the fiduciary would not take a deduction, and the beneficiary would not report the distribution as income. Second, charitable bequests do not carry out DNI, and result in a deduction for the entity, but not a reportable distribution to the beneficiary.

CAPITAL GAINS Capital gains are not included in DNI unless the trust instrument requires or permits the inclusion of capital gains in income and distribution to beneficiaries. (See also Reg. 1.643(a)-3(b), providing that capital gains may be included in DNI to the extent they are allocated to income, allocated to corpus but consistently treated by the fiduciary as distributed to a beneficiary, or allocated to corpus but used to determine the amount that is or is not required to be distributed to a beneficiary.) Capital gains are included in DNI (and reported on Schedule K-1) in the year of termination of the estate or trust, when the capital gains are distributed to beneficiaries.

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end of the taxable year as having been made during the taxable year, thus allowing this amount to be deducted. The “65-Day Rule” is permitted for distributions up to the greater of DNI or fiduciary accounting income and must be made by checking the appropriate box on Form 1041. This rule provides a fiduciary with flexibility to assess a beneficiary’s income tax situation early in the taxable year (including whether income allocated to the beneficiary would be taxed at a lower rate, reduce NIIT for the entity, or offset a deduction otherwise available to the beneficiary), thus allowing the fiduciary to distribute income in a manner that produces the best income tax result for the entity and beneficiaries.

FINAL YEAR Separate rules apply during the estate or trust’s year of termination. The beneficiary will receive all current and previously undistributed income, and all remaining principal of the entity. See Reg. 1.641(b)-3(d). An estate is considered terminated when probate is complete and all of the estate assets have been distributed to the beneficiaries. A trust is considered terminated when the terminating event occurs as defined by the trust instrument. During the year of termination, all trusts are considered complex trusts. Neither an estate nor a trust must be terminated at the end of a normal fiscal year. Unused net operating losses and capital losses carry forward to the beneficiaries. The carry forward period for net operating losses is subject to a 20 year cap, including the combined beneficiary and fiduciary tax years for which the loss could have been used. The carry forward period for capital losses is unlimited. The beneficiary may take as a deduction all other expense deductions which exceeded the entity’s income during the year of termination.

CONCLUSION 65-DAY RULE Typically, an income distribution deduction is allowed to be claimed by the entity only to the extent that amounts were actually paid or credited to the beneficiary during the taxable year. However, under IRC Section 663(b), a fiduciary may elect to treat a distribution made to a beneficiary within 65 days of the

The current favorable estate tax laws mean that very few of our clients need be concerned with transfer tax planning. However, fiduciary income tax will come into play in just about every estate and trust administration. A general familiarity with these rules will enable practitioners to provide improved service to clients, both in the planning stage as well as when the estate plan inevitably “matures.”

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Member Spotlight

Law Office of Eden Rose Brown Estate and Legacy Planning 1011 Liberty St. SE

EDEN ROSE BROWN

Salem, Oregon 97302

WealthCounsel Member since 2001

503.581.1800 | edenrosebrown.com

WealthCounsel’s Matt McClintock sat down with founding member and serial innovator Eden Rose Brown for this issue’s member spotlight. Eden is the principal attorney of the Law Office of Eden Rose Brown based in Salem, Oregon.

MM: Tell me how you got started in estate planning.

During the 1990s I was a JAG officer in the United States Air Force. I was a prosecutor and Assistant U.S. Attorney, and I enjoyed being in court. As the United States started deploying troops for Desert Shield and Desert Storm, my commander summoned me to his office to discuss establishing an estate planning program to serve deploying troops. At the time I knew very little about estate planning, but when a colonel asks you to do something, you figure out quickly how to make it happen.

I rapidly got up to speed on the law of wills and trusts, organized a process that would efficiently serve 20,000 troops, and in the course of about 18 months, I personally drafted over 8,000 wills, trusts, health care documents, and powers of attorney for deploying personnel, while my team handled the rest. One of the things that opened my eyes to the opportunities of estate planning came from this time spent working with military folks on their estate plans.

They taught me that estate planning wasn’t about the “stuff;” it was an opportunity to pass on their hearts and souls. It was about integrity, responsibility, and passing on to their loved ones the more important aspects of their legacy.

That resonated with me and it changed my life. I had found my passion, and when I left active duty, I moved PAGE

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home to start my own estate and legacy planning practice. I wanted a practice that was unique; one that incorporated a family’s values, heart, and soul.

MM: What did a “unique” estate planning practice mean to you?

For one, I quickly got rid of the billable hour. Every attorney I knew then did all their planning based on a billable hour and would charge clients for every little thing. For my clients there would be no “nickel-anddiming.” I wouldn’t charge them for faxes, copies, phone calls, home visits, postage or emails. I would simply factor all that into a flat, fixed fee.

The purpose was to allow the clients to feel free to open up, relax, and discuss issues important to them, rather than watching the clock. In estate planning, more than any other area of the law, we have to get our clients to open up to us. How can they comfortably do so if they are charged by the hour, or if they’re limited to a two-hour meeting?

I also intentionally set out to be the most expensive estate planner in the area. That may sound odd but when I started my practice, living trust mills were common and planners competed for every client. I wanted to differentiate my practice and my planning philosophy.

Of course, I knew I had to do more than be expensive.

I had to distinguish my practice on quality, creativity, and unmatched service. I called myself an estate and

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legacy planner, to help differentiate my practice.

MM: How does that high cost translate through your referral sources?

I started building my practice by asking people I respected in the community to give me the names of the “best CPAs in town” or the “top financial advisors in town.” I did this for trust officers, insurance professionals and attorneys as well, and ended up with a list of top advisors in the community. I pared down the list to the top five in each category, and then reached out to every one of them.

I shared with them - over a two to three hour meal that I understood they have an excellent reputation in their field and that I only want to work with the very best. I’d meet with them and take my own estate planning portfolio with me.

I’d try to get them to speak first so I could listen carefully and understand their greatest concerns – professionally, about serving clients, their family situation, everything. I’ve found that if you let others speak first as you guide the discussion, you learn a lot about what drives them. I could then focus the discussion on how innovative, forward-thinking planning strategies can address their concerns. Since I related our planning concepts back to them personally, they paid attention! It wasn’t just another meet and greet with yet another attorney. They were hooked.

As I built strong relationships with them it established an ongoing source of qualified clients to feed the practice. Because I had invested in them and nurtured the relationship, those advisors were able to “pre-sell” my approach – and my fees - to their clients. By the time I sat down with a client who came in from one of those relationships the client was ready to move forward because of the work the advisor had already done. My closure rate remains above 95%, due in large part to this referral-based practice model.

As I meet new rainbrokers I let them know that I am probably the most expensive estate planner in town, but that the value, quality, and innovation we provide their clients justifies the fee. When those advisors provide our name to their best, most huggable clients, they set the cost expectation so I rarely have pushback on fees. The advisor makes it clear that if their client wants the best for their family, why wouldn’t they want the best planning possible?

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MM: How do you establish your pricing and how do you communicate the fees to clients?

We work from a diagram we call the “fee wheel.” The wheel illustrates our fee structure, and breaks down our plan pricing into three levels: Essentials, Foundation, and Legacy. We have a fourth level – Laureate for ultra-high net worth clients, but that is a separate document. Working from an established fee range makes it easier for us to assess fee sensitivity, quote fees, and have more transparency with our clients and advisors. It also shows them that our pricing isn’t arbitrary.

After the design meeting we send out a comprehensive engagement letter and request half of the fee down as a retainer with the balance due at the signing ceremony - provided the client sees the value in the fee quoted. We may be the only firm in the country that provides a written, 100% retainer-back guarantee if a client doesn’t see the value in their planning fee.

I’ve never had a client take me up on it, but the guarantee gives them confidence that they are making a wise, no-risk investment in their planning.

MM: What does a typical client engagement look like?

I am very intentional about not letting my fee structure diminish the amount of time I can spend with clients. It takes a lot of time to bond with a client and I am committed to creating that with my clients. And so I built my estate planning engagement around a three-step process.

Our Initial Client Meeting is typically four to six hours long, but often longer. That time is spent getting to know the clients on a deep and personal level: what drives them, what are they passionate about, what are their concerns and fears, what’s most important to each of them…

The next step is the Design Meeting, which lasts another four to six hours. We craft customized strategies together on a Smartboard, so the client is fully bought-in and has real ownership of the plan we design. Each plan is unique, just like the client.

The final step is when we execute the documents and implement the plan. That also takes four to six hours.

The clients are deeply engaged at that point and they know that we have poured our hearts and souls into their planning.

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MM: You bring a lot of psychology into the planning process. How does that impact your client relationships?

Psychology and an understanding of human nature plays a part in every aspect of the practice. From the structure of the initial client phone call, to having a warm fireplace and nice amenities in the bathroom, to requiring attendance at a four-hour workshop, to collecting donations for food share, to providing lunch and fresh-baked cookies in the afternoon, to having a formal signing ceremony with special signing pens, to having coordinated branding materials in rich and elegant tones, to ending every meeting with a hug… every nuance in the practice has a purpose.

I was a psychology major at Berkeley, but I’ve also always been an observer of culture. I think a lot about how we as professionals can use our skills and creativity to bring the technology of the practice forward and be relevant in a modern cultural context.

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ever reality our clients want us to create for them, but to do so effectively, we must be innovative and forward thinking in addressing current culture. This means our planning strategies must address modern social issues such as divorce, affluenza, asset protection, blended families, incapacity, remarriage, etc.

The definition and composition of families has been changing for quite some time, and our clients’ lives are more complex than ever. And yet with all the growing complexity, the “technology” of estate planning law remains mired in the past; it’s terribly antiquated. As values-based estate planners we are the vanguard to move estate planning technology forward to address modern complexities.

For example, to maximize flexibility in our planning, we make extensive use of advisory panels. Panels, like committees, are flexible, and allow decisions to evolve with the changes in family and in the law.

On an individual client basis that helps me focus on what is really driving the client. Are they passionate about their faith? Do they have a special affinity for their pets? Do they have problems with their kids?

Are they concerned about transferring their business?

Where is this person’s greatest need and how can I help satisfy that need? If you can address that for a person, you have them as a forever client. Our job is to connect with people, figure out what makes them unique, and honor that in their planning.

I’m fortunate to work with so many clients who are mindful of their legacy beyond the wealth they leave their kids. When I meet with clients I always bring up the concept of “philanthropic wealth” and its ability to make a profound impact on future generations.

Most of my clients believe there is something greater than themselves and that they are kind of duty-bound to help repair the world. When you capture this concept in an estate plan it makes an incredible impact on children. They realize that mom and dad’s plan isn’t really all about them. It’s about how they grow up, be grateful, and learn to do something impactful for their communities.

MM: To what extent does innovation play a role in the solutions you create with clients?

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An innovation I’m particularly proud of is our use of Financial, Family, and Faith Mentors. We encourage parents to name trusted family, friends, and advisors to serve as the child’s “village” if the parents die when the children are in their formative years. These folks are there to help the child cope with their grief, help them make financial decisions later in life, and, in families of faith, help them continue along their spiritual path. These are honorary roles, not legal roles, but parents consider the mentors as extensions of themselves. These mentors can make a huge impact on a child when their parent is no longer there for them.

“

I APPRECIATE THAT WEALTHCOUNSEL CONTINUES TO INNOVATE AND EDUCATE WHILE PROMOTING A CULTURE BASED ON KNOWLEDGE, COMPASSION, AND INTEGRITY. WEALTHCOUNSEL MEMBERS ARE THE LEADERS AND INNOVATORS IN THE ESTATE PLANNING INDUSTRY.

“ MM: How have you captured clients’ values in their estate plans?

Some of the best examples have come from clients with a strong spiritual, or faith-based background.

My first Mormon client taught me about the importance of genealogy and tracing their family’s bloodline. They had brought wills to our initial meeting dating from the 1600’s. They had traced their ancestry through European probate courts.

I realized that if these clients did living trust-based plans there would be a gap in their genealogy that would create challenges for future generations to find them. So I devised a document I called a “legacy will” that doesn’t transfer property, (we use the funded living trust for that), but that gets admitted to probate as a family record and serves as a statement of faith for future generations to find. These clients loved PAGE

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the combined approach of the Legacy Will and living trust. They told all their friends, which led to more clients and an established niche in LDS planning.

Faith-based values also factor into our disability planning provisions. I have worked with clients and their religious leaders to develop and incorporate provisions specific to each person’s faith to help them articulate their religious convictions in their estate planning strategies. This type of faith-based planning was so unique in our community that clergy invited me to talk to their congregations about faith-based estate planning. Those have been some of the most rewarding and productive speaking engagements I’ve had.

MM: What has been one of your biggest challenges to growing your practice?

The biggest challenge for me has been getting the highest-quality talent. I found out the hard way how absolutely essential that is. Several years ago as we were growing rapidly I made some hires that weren’t ideal. Quality diminished, productivity plummeted, and I had to let nearly everyone go and rebuild the practice from the ground up.

I now have my dream team of attorneys and staff.

I found that attorneys who bring who they are into their client relationships are the most successful and fulfilled legacy planners. The finest attorneys I’ve found aren’t afraid to share their stories, and they’re involved and vested in their communities.

MM: What has WealthCounsel meant to your practice?

I’m proud to say that I’ve been with WealthCounsel from the very beginning. While it has matured as a company, I appreciate that WealthCounsel continues to innovate and educate while promoting a culture based on knowledge, compassion, and integrity.

WealthCounsel members are the leaders and innovators in the estate planning industry.

For example, consider the industry-leading use and thoughtful evolution of trust protectors in Wealth Docx. WealthCounsel has also led the way in incorporating the Clayton election for marital trust planning, decanting to provide flexibility, emphasizing the use of lifetime trusts for beneficiaries, plain English drafting… The list goes on. No other group of attorneys has innovated like that. The industry has only begun to catch on to many of the things we’ve been doing in WealthCounsel for years.

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“Wealth Docx™ allows me to draft individualized trusts with a variety of

DOES YOUR DRAFTING PROVIDE THE FLEXIBILITY YOUR CLIENTS NEED?

components, like special needs trusts, so I can really tailor the plan to my client’s needs.”

- KAREN SHIRLEY, JD MEMBER SINCE 2013

Wealth Docx™ helps you plan for future changes.

In today’s era of sweeping changes, you need to help your clients be prepared. How do you give them maximum flexibility and the right options for the future? Let Wealth Docx™ show you how. As the nation’s leading trusts and estates drafting system, Wealth Docx™ provides the tax and planning flexibility options you need, including trust protectors and the power to decant.

Circumstances change. Help your clients feel confident about the future.

Get Wealth Docx™.

Our practice consultants can give you a personal demonstration of all the drafting solutions in Wealth Docx™. Contact WealthCounsel today: CALL (888) 659-4069 #819 EMAIL info@wealthcounsel.com OR VISIT wealthcounsel.com PAGE

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Hindsight is 20/20: A Review of Selected 2015 LLC Cases MARTY OBLASSER, JD

Fortunately for our profession, the only guarantee is that the laws are ever-changing. In 2015, over 200 published decisions involved limited liability companies. This article provides a multi-jurisdictional review of important LLC cases involving topics for every business law practitioner.

PIERCING THE LIMITED LIABILITY VEIL IN DELAWARE CASE BACKGROUND In A.G. Cullen Const., Inc. v. Burnham Partners, LLC1, Burnham Partners, LLC (Burnham), an Illinois LLC, was formed by its sole member, Robert Halpin.2. In June 2005, Burnham formed Westgate Ventures, LLC (Westgate), a Delaware LLC.3 The members of Westgate were Burnham, with a 90% interest, and Felix Fukui (Fukui), who owned the remaining 10%.4 Westgate was governed by a limited liability agreement (Agreement), which gave Burnham, as the initial manager of Westgate, numerous duties including acquisition, ownership, improvement, sale, and lease of company property.5 Furthermore, the Agreement required each member to make a capital contribution to Westgate. Burnham never made a capital contribution, but rather, Robert Halpin and his wife, Lori, borrowed money from Northern Trust Bank and then loaned $175,000 to Westgate.6 Westgate executed a note in the Halpins’ favor, which was due upon the sale of a property purchased in Pennsylvania.7 Shortly after forming Westgate, Burnham entered into a development and asset management agreement (Development Agreement) with Westgate.8 Burnham PAGE

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agreed to provide development services, and in return Westgate would pay Burnham a development fee of $400,000.9 On November 17, 2005, Westgate contracted with A.G. Cullen Construction, Inc. (Cullen Inc.), a Pennsylvania corporation, to build a warehouse in Pennsylvania.10 Shortly after entering into the construction contract, Westgate refused to remit $360,000 as payment, and Cullen Inc. filed its demand for arbitration.11 Three months prior to the arbitration hearing, Westgate sold the warehouse facility for $3.2 million. After the sale, Halpin began to windup Westgate and liquidate its assets. From the proceeds of the sale, Halpin paid: •

$2,513,984.01 to S & T Bank (a secured creditor)

•

$120,000 to Northern Trust for the loan the Halpins made to Westgate

•

$400,000 to Burnham for the development fee, which was later transferred to Halpin

•

$97,530.44 directly to himself and his wife for reimbursement of advances12

In September 2007, the arbitrator entered an award of $448,406.87 in favor of Cullen Inc. and against Westgate. Upon realizing Westgate was unable to satisfy the debt, Cullen Inc. sued Burnahm LLC, Lori Halpin, Robert Halpin, and Westgate to recover the amount

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owed by Westgate.13 During the bench trial, Cullen Inc.’s representative testified he believed Robert Halpin, Burnham, and Westgate “were one and the same.” Id. On cross-examination, Cullen Inc. acknowledged it never obtained a personal guarantee from Robert Halpin and the construction contract was only with Westgate. Id. at 584.

Robert Halpin testified that Westgate and Burnham were separate entities and held separate operating and capital accounts.14 Halpin acknowledged that under Burnham he was not entitled to compensation for serving as manager of Westgate; but, pursuant to the Development Agreement, he was owed $400,000 as an independent contractor for performing essentially the same duties as the manager.15 Lori Halpin testified she did bookkeeping for both Burnham and Westgate, but was not an employee of either company, despite the listing on her LinkedIn profile. Id. at 585. Lori Halpin was unable to locate Westgate’s books, minutes, and records regarding corporate formalities, business activities, and debt.16 At the close of evidence, Cullen Inc. requested an adverse inference against defendants for failing to turn over requested documents and specifically asserted: •

Robert Halpin failed to honor the company structure of Westgate

•

Robert Halpin did not treat Westgate and Burnham as separate entities

•

Robert Halpin did not keep Burnham and Westgate separate from himself

•

The records would have shown Lori Halpin ran Robert Halpin’s business for him and Westgate was an alter ego of Robert Halpin, Lori Halpin, and Burnham

•

Because Robert Halpin made a loan to Westgate rather than a capital contribution as required, Westgate did not receive reasonably equivalent value in exchange for its payment to the Halpins

•

Westgate did not receive reasonably equivalent value in exchange for its $400,000 payment to Burnham and Halpin17

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dants. The court further found: Cullen had no claim against defendants under the Delaware Limited Liability Company Act. *** That Act provides that when winding up a limited liability company, assets “shall be distributed to creditors, including members and managers who are creditors.”

Id. Because Burnham was a member and a creditor, the court found that distributions to Burnham and the Halpins were not impermissible. The court also found defendants did not violate the Pennsylvania Contractor and Subcontractor Payment Act, as Cullen’s contract was with Westgate and no privity of contract existed between Cullen, Burnham, and the Halpins.

The court found that the evidence suggested Burnham and Westgate were bona fide independent entities that kept proper corporate books and records, and were properly funded. The court stated that Burnham properly earned its $400,000 development fee, which had been deferred for two years and that the Halpins were entitled to be repaid for their $175,000 loan to Westgate, that those disbursements were not made with the intent to hinder or defraud Cullen, and that the mere preference of one creditor over another does not constitute fraud.... Lastly, the court stated that Cullen could have contracted to protect itself by, for instance, asking Robert Halpin for a personal guarantee or requiring a performance bond, but failed to do so.18 On appeal, Cullen Inc. argued the trial court erred because: •

•

•

•

Burnham and Halpin acted fraudulently under section 5(a) of the Uniform Fraudulent Transfer Act (UFTA) when disbursing $470,129.58 of Westgate’s assets to Burnham, and $120,000 to the Northern Trust to repay the Halpins’ loan to Westgate The limited liability veil should have been pierced under Delaware law due to defendants’ fraudulent actions, and because Westgate was an alter ego of Burnham and the Halpins Halpin breached its fiduciary duty to Westgate by making fraudulent insider disbursements to Burnham, himself, and his wife The appellate court agreed with Cullen Inc. on all points and reversed and remanded the matter back to the trial court19

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KEY TAKEAWAYS Uniform Fraudulent Transfer Act The court considered the 11 factors set forth by UFTA Section (5) when determining if actual intent existed and whether this case involved fraud in fact.20 The court noted, “Proof of some or even all of the factors included in Section 5(b) does not create a presumption that the debtor had the actual intent to defraud.

But the presence of these ‘badges of fraud’ may, in sufficient number, give rise to an inference or presumption of fraud.”21 Conducting the factor analysis outlined in UFTA Section 5(b), the court determined: •

Robert and Lori Halpin were respective “insiders” of the LLCs and were in control

•

Contrary to the trial court’s finding, Halpin did not act in “good faith” or “substantially comply” with the terms of the construction agreement

•

There were 9 of the 11 badges of fraud present22

Disconcertingly, the court also reviewed the Development Contract between Westgate and Burnham, and the loan agreement between Westgate and the Halpins. The court found Westgate did not receive “reasonably equivalent value” in exchange for the payments in either transaction.23 Piercing the LLC Veil Pursuant to Delaware Law Delaware is known for respecting businesses’ contractual rights and “[a]bsent sufficient cause the separate legal existence of a corporation will not be disturbed.”24 Nevertheless, “the corporate veil may be pierced where there is fraud or where a subsidiary is in fact the mere alter ego of the parent.”25 When determining if an alter ego exists, the court considered: •

whether the company was adequately capitalized

•

whether the company was solvent

•

whether dividends were paid, company records kept, officers functioned properly, and other company formalities were observed

•

whether the majority member siphoned corporate funds

•

whether, in general, the company simply functioned as a facade for the majority member26

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While the trial court found no basis for piercing the veil because Westgate kept separate records, was properly funded, and did not commingle its funds with the funds of the Halpins or Burnham, the appellate court disagreed due to the fraudulent conveyances.27 Fiduciary Duty Once Westgate became insolvent, Robert Halpin, as the manager of Burnham, owed a fiduciary duty to Cullen Inc. as a creditor of Westgate, to manage its assets properly and in the best interest of creditors. Id. Halpin breached that duty by making fraudulent insider disbursements to Burnham, himself, and his wife, leaving Westgate without assets to pay the amount owed.28

CONFLICTS-OF-LAW Only with clients who operate their businesses solely in the state of formation, where the only potential parties to a lawsuit are residents of that state, is it unnecessary to discuss conflict of law. In Heaps v. Nuriche, LLC29, it would not be surprising to learn the Nevada LLC’s attorney never advised its client that Utah Law may apply to a dispute with its employees, and that the court may look to Pennsylvania law for guidance.

CASE BACKGROUND In Heaps, employees of Nuriche, a Nevada LLC registered to do business in Utah, sought to hold the managers personally liable for unpaid wages under the Utah Payment of Wages Act (UPWA).30 The UPWA provides for civil and criminal liabilities on the part of employers for unpaid wages owed. Id. The UPWA defines an “employer” as “every person, firm, partnership, association, corporation, receiver or other officer of a court of this state, and any agent or officer of any of the above-mentioned classes, employing any person in this state.”31 The managers contended the Utah Revised Uniform Limited Liability Company Act (URULLCA) provides “[t]he law of the jurisdiction of formation of a foreign limited liability company governs… the liability of a member as a member and a manager as manager for a debt, obligation, or other liability of the company.”32 Therefore, because Nurich was formed in Nevada, the URULLCA would require Nevada law be applied to

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determine whether managers were personally liable for unpaid wages.33 The court determined that since the employees were not seeking to hold the managers liable for Nurich’s obligation but rather impose direct liability on the managers, the URULLCA did not apply.34 Ultimately, the employees argued under UPWA two interpretations of “employer” that would render the managers personally liable, the second of which is recognized by other courts, namely Pennsylvania.35

KEY TAKEAWAYS Rapidly advancing technology schrinks our world and globalizes our clients. While the Nuriche court ultimately disagreed with the employees’ (and the Pennsylvania court’s) interpretation of “employer,” this case is an excellent example of counseling our clients about the long arms of various jurisdictions.

WHO CARES WHAT THE OPERATING AGREEMENT SAYS? Meyer Natural Foods LLC v. Duff,36 gives us an alternate view when considering the internal governing documents of an LLC. The Delaware court looked beyond the four corners of the LLC’s Operating Agreement (Agreement) and considered two ancillary agreements that were executed simultaneously with the Operating Agreement.

CASE BACKGROUND Respondents formed a Delaware LLC and subsequently sold 51% of the interests to Meyer Natural Foods LLC.37 Accordingly, the parties executed: (1) a Purchase Agreement, (2) an Amended and Restated Operating Agreement, and (3) an Output and Supply Agreement.38 The Output and Supply Agreement referenced the other two documents, but the Operating Agreement specifically included an integration clause stating it was the only agreement between the parties.39 The majority member, Meyer, sought a judicial dissolution of the company even though the Operating Agreement stated “absent prior written consent of a majority of the interests held by the other [minority] PAGE

51

QUARTERLY

members, the managing member could not cause the Company to undertake or engage in … the dissolution of the Company.”40 Nevertheless, “Section 10.1 clarified that dissolution is mandatory upon ‘(a) the entry of a decree of judicial dissolution pursuant to the [LLC] Act; (b) the determination of the Managing Member and a Majority in Interest of the other Members at any time to dissolve the Company; or (c) the Sale of the Company.’”41 The court stated, “The LLC Act permits judicial dissolution ‘[o]n application by or for a member or manager... whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.’”42 The court found the Operating Agreement language unambiguous. Nevertheless, the court found “Meyer’s argument to look beyond the purpose clause of the Agreement” was persuasive.43 Therefore, upon considering the Purchase Agreement, the Operating Agreement, and the Output and Supply Agreement, the court determined the Company was formed for a single, very specific purpose that could no longer be accomplished as a result of the members’ dispute and should be judicially dissolved.44

KEY TAKEAWAYS As practitioners, we must be mindful that the documents we draft govern business affairs and ensure they work in concert with each other. When relying on “standard” or “form” language, it is important that the language does not conflict with the client’s intentions or other documents that may dictate future business disputes.

WHERE SOCIAL MEDIA DISPUTES BEGIN AND BUSINESS INTERESTS END With internet capabilities, business owners have unprecedented opportunities to reach customers. Accordingly, practitioners are forced to consider “social media interests” when addressing business succession planning. Davis v. VCP South, LLC,45 , highlights the ramifications of drafting broad succession language and what grieving spouses are capable of doing.

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CASE BACKGROUND Davis involved plastic surgeons, Davis and Roth, who formed VCP South, LLC (VCP South). Each surgeon owned a fifty percent membership interest in the joint vein care practice.46 They became known as “The Vein Guys” and applied for various federal trademarks, including “The Vein Guys” and “We’re So Vein.”47 While VCP South paid for the trademarks, they were registered solely in Davis’ name, unbeknownst to Roth. Id. On January 2, 2010, Davis died unexpectedly.48 Under the Operating Agreements, Roth had the right of first refusal to purchase all of Davis’ membership interests.49 Roth timely exercised his options.50 Shortly thereafter, negotiations between Roth and Davis’ personal representative (his widow) broke down.

Accordingly, Roth sought to enforce the Operating Agreements and obtain a declaratory judgment that the trademarks belonged to the LLCs.51 The trial court appointed a special master to consider Davis Estate’s objections to the valuation as well as the extent of the estate’s interests in the LLCs. On December 12, 2011, the special master found that pursuant to the terms of the Operating Agreement, Davis ceased to be a member of the LLCs on the day he died and his estate thereafter maintained only financial rights, including (1) the right to share in the profits and losses of the company, (2) the right to interim and terminating distributions, and (3) the right to capital interest, ‘until such time as a closing occurs to purchase his Membership Units.’52 While the Operating Agreement did not set a time limit for the closing to occur, it did set a “reasonableness” standard for any party attempting to prolong the sale of a deceased member’s interests.53 According to the special master, since Davis’ widow had to accept the purchase price established by a CPA, Davis’ Estate’s financial rights were terminated on September 30, 2011.54 Due to litigious delays, the closing was not accomplished until December 2013.

On March 6, 2014, Davis’ widow contacted Facebook and asserted ownership over the page The Vein Guys and claimed infringement, even while the lawsuit concerning ownership of the trademarks remained pending.55 As expected, Facebook disabled the page and stated it would remain offline until Facebook received “explicit notice of consent from the complaining par-

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ty.”56 As of the date of this article, The Vein Guys had approximately 2,000 “likes” on its Facebook page, which explains the measures taken to have this issue heard at an emergency hearing. Finding Plaintiffs would suffer irreparable harm, the court ordered Davis’ widow to have the Facebook page reinstated immediately.57 After issuing a second order requiring the widow to pay $1,000 per day if the Facebook page was not activated by April 5, 2014, she boldly did not reactivate the Facebook page until April 14, 2014.

KEY TAKEAWAYS While no amount of specificity in the Operating Agreements would have fully resolved these par-

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ties’ issues, failure to set forth timeframes concerning the expiration of a deceased members’ interests and financial rights caused needless delays and additional costs of employing a special master.58 Additionally, with the major role social media now plays our clients’ businesses, we will see increased litigation concerning these outlets. As Davis demonstrates, Facebook will not necessarily reinstate a page, even if a judge orders such… twice. The CEO testified that even a 5% downturn in patients would cost the practice $60,000 per month.59 As practitioners, we must create solutions that proactively protect our clients’ “social media interests” because of the potential financial ramifications.

ABOUT THE AUTHOR A Wyoming native, Marty L. Oblasser (WealthCounsel Member since 2015) attended the University of Wyoming to obtain both her undergraduate and juris doctor degrees. Marty began her career as an associate attorney in the Legacy Planning Department with a law firm in Casper, Wyoming. During that time, she not only focused on building an estate planning and business law practice but she also engaged in trust litigation matters and successfully argued to the Wyoming Supreme Court. Marty is a partner with Wyoming’s oldest law firm, Corthell and King, P.C. and is licensed to practice law in the State of Wyoming as well as the United States District Court for the District of Wyoming.

Marty enjoys educating the public about various estate planning and business law matters as well as teaching legal seminars for her local community and presenting continuing legal education courses to her peers for the Wyoming State Bar and the National Business Institute.

Marty, her husband, Erik, and their two dogs reside in Laramie, Wyoming.

ENDNOTES 1 A.G. Cullen Const., Inc. v.

Burnham Partners, LLC, 29 N.E.3d 579 (Ill. 2015),

15 Id.

30 Id. at 656.

16 Id.

31 Id. at 659.

17 Id.

32 Id. at 658 (quoting Utah Code § 48-3a-901(1))

45 Davis v. VCP South, LLC, 774 S.E.2d 606 (Ga. 2015) 46 Id. at 609.

47 Id.

33 Id.

48 Id.

34 Id. at 658.

49 Id.

35 Id. at 658–59.

50 Id. 51 Id.

22 Id. at 588.

36 Meyer Natural Foods LLC v.

Duff, 2015 WL 3746283 (Del. Ch. June 4, 2015) (unpublished)

7 Id.

23 Id. at 588–89.

37 Id. at *1.

8 Id.

24 Id. at 590.

38 Id.

9 Id

25 Id.

39 Id.

10 Id.

26 Id. at 590-91.

40 Id.

11 Id.

27 Id. at 591.

41 Id.

12 Id. at 583.

28 Id.

42 Id. at *2.

13 Id.

29 Heaps v. Nuriche, LLC, 345 P.3d 655 (Utah 2015),

43 Id. at *3-4.

2 Id. at 581

18 Id. at 585–86.

3 Id.

19 Id. at 586.

4 Id.

20 Id. at 587.

5 Id. at 582.

21 Id.

6 Id.

14 Id.

52 Id. at 609.

53 Id. at 610.

54 Id. 55 Id. 56 Id. 57 Id. 58 Id. at 610.

59 Id. at 612.

44 Id.

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Education Calendar

10 NUMBER 1

Q1 JAN 7-8

Media for Lawyers Virtual Workshop

JAN 14

Springboard Orlando, Orlando, FL

JAN 14

Team Empowerment Session

FEB 18

Word on the Street: Federal & State Issues in Planning for Firearms

FEB 19

Texas State Forum Meeting

FEB 25

Team Empowerment Session

FEB 26

Illinois State Forum Meeting

FEB 26

Asset Protection Forum Meeting

FEB 29- MAR 11

EP100: Estate Planning Essentials

MAR 10

Team Empowerment Session

MAR 10-11

Michigan State Forum Meeting

MAR 15

Thought Leader Series webinar Word on the Street: When and Why ILITs are Still Useful

JAN 18-20 BP102: ABCs of LLCs JAN 21

Word on the Street: Looking Forward From Orlando

JAN 21

Arizona Forum Roundtable

JAN 28

Team Empowerment Session

JAN 28-29 Quick Start Workshop – Part 1 FEB 5

Northwest Forum Meeting

FEB 5

Massachusetts State Forum Meeting

FEB 8

Family Business Divorce

MAR 17

FEB 11

Team Empowerment Session

MAR 21-25 EP107: Firearms Law

FEB 16

Agriculture Planning Forum Meeting

MAR 24

Issuing, Dividing and Transferring LLC Membership Interests

APR 14

Arizona Forum Roundtable

MAY 24

Choice of Business Entity

APR 26

Piercing the Entity Veil

JUN 1-8

EP205: Understanding Retirement Plans and SRT Drafting

APR 27 -MAY 11

TX100: Tax Camp JUN 7

Thought Leader Series webinar

MAY 6

Illinois State Forum Mega Meeting

JUN 16

Word on the Street webinar

MAY 13

Northwest Forum Meeting

JUN 17-18

Arizona Forum Meeting

MAY 19

Word on the Street webinar

JUN 21

Fiduciary Duties and the Business Judgment Rule

Q2

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