Originally published at bryancavefiduciarylitigation.com
Big news out of Massachusetts this week, as the Supreme Judicial Court ruled in Bird Anderson v. BNY Mellon, N.A. that a Massachusetts law that had significant implications for trusts and estates planners, fiduciaries, and especially adopted children was unconstitutional as applied to the trust case before it.
Let’s take a look at the law.
The rights of adopted children as “heirs” under Massachusetts law have a long history.
Prior to 1958, Massachusetts had a statute prescribing a rule of construction for certain types of instruments relating to inheritance that provided that unless the contrary “plainly appear[ed] by the terms of the instrument,” an adopted child was excluded from the definition of “‘child,’ or its equivalent” unless the child had been adopted by the person creating the testamentary instrument.
In 1958, the statute was amended in a way that effectively reversed the presumption concerning adopted children and issue: the term “child” or its equivalent was redefined to include an adopted child generally (i.e., not only where the settlor, grantor, or testator was the adopting parent), unless a contrary intent “plainly appear[ed]” in the instrument. By its terms, however, the 1958 amendment applied only to wills, trusts, and the like executed after its effective date: August 26, 1958. Simple enough, right?
Well, in 2009, the Massachusetts legislature enacted another amendment to this statute that was effective July 1, 2010, and that made the 1958 amendment applicable to all testamentary instruments regardless of when executed. In other words, the amendment made the 1958 amendment retroactive. And that was the problem for the Supreme Judicial Court.
The legislature can enact retroactive statutes, but such statutes must meet a test of reasonableness. The statute here failed. In the case before the court that led to the ruling, retroactive application would have significantly decreased the income distribution of the testator’s biological great-grandchild from 50% to 16.6% if she had to share the income with her adopted brothers. The biological great-grandchild’s interest in the trust vested prior to the effective date of the 2009 amendment. Adding her adopted brothers to the class of “issue” entitled to be trust beneficiaries cut down her vested interests significantly.
Likewise, the statute undermined the intent of testators and grantors. At the time the amendment was enacted in 2009, long-deceased testators and grantors were unable to change their estate plans in response to the new presumption. In Massachusetts, testators and grantors are entitled to rely on the state of the law at the time of execution of a will or trust instrument.
The Massachusetts court did recognize that other states have decided this issue differently. Notably, Maryland, Illinois, North Carolina, and Rhode Island have all reached results different from Massachusetts. The court did note that Colorado and Georgia had reached results similar to that which it reached.
The court did also note that the decision was focused on the factual situation before it, what it held in this case ”presumably applies to others who, like the plaintiff, have significant interests in pre-1958 trusts or other grants or devises, subject only to divestment by predeceasing an existing beneficiary or to dilution through the birth of others.”
The court also provided some comfort to fiduciaries: “our decision does not make unreasonable any distribution to adopted beneficiaries made in reliance of the 2009 amendment between July 1, 2010, and the date of this opinion, nor does it make unreasonable a trustee’s declination to make such distributions.”
The IRS has released a new draft Form 706 for estates of decedents dying in 2012. It is important to note the IRS’ caution at the beginning of the draft Form:
“This is an early release draft of an IRS tax form, instructions, or publication, which the IRS is providing for your information as a courtesy. Do no file draft forms. Also, do not rely on draft instructions and publications for filing. ”
Let’s just jump right into this one: in 2010, a Houston County, Georgia jury declared that a Will and a Revocable Trust executed by Thomas Hines, Sr., in 2002 were invalid, as they were the product of undue influence.
In Davison v. Hines, the Georgia Supreme Court affirmed the jury verdict. The reason we just jumped right into the discussion of this case is because undue influence cases are fact-intensive. So, let’s look at the facts that supported the verdict.
– Thomas’s 2001 will left the bulk of his estate to his wife for her life, and upon her death, divided the estate equally between his sons. Thomas’s 2002 will, however, gave Steve Davison and his wife, Deborah, control over Thomas’s assets and estate. Deborah was a granddaughter of Thomas.
– In December 2001, although Thomas didn’t want to move from his home, the Davisons made arrangements to move Thomas into their home.
– The evening that Thomas was moved into the Davisons’s home, the Davisons enlisted a lawyer to draft and oversee Thomas’s execution of a power of attorney, which gave the Davisons control over Thomas’s affairs and property. Steve Davison then used this power of attorney to write two checks to himself: one for $100,000 and another for $150,000.
– Around the same time, Deborah Davison started expressing displeasure with Thomas’s 2001 will, and Steve Davison used a lawyer to begin creating Thomas’s 2002 will and trust.
– The Davisons began isolating Thomas from all but very controlled contact with the rest of the family – even preventing Thomas’s sons from visiting or speaking with their father on more than one occasion.
– The 2002 will and trust were drafted and ready for signature based solely on input from Steve Davison.
– When Thomas met with the Davisons’s attorneys to discuss his testamentary plan, Thomas indicated that he wanted to provide for his wife, Mary, but also stated that whatever Steve and Deborah agreed upon is what he wanted to do. He said he would sign anything Steve and Deborah wanted.
Based on the foregoing evidence, the Georgia Supreme Court concluded that sufficient evidence existed for the jury to conclude that a confidential relationship existed between Thomas and the Davisons and that the Davisons took an active role in the planning, preparation, and execution of the 2002 will and trust such that their will was being substituted for that of Thomas’s will in the creation of the documents. Therefore, the evidence was sufficient for a jury to conclude that these documents were the product of undue influence.
Like so many undue influence cases, the plaintiffs also brought a claim that the documents were invalid based on lack of capacity. What’s interesting is that the lack of capacity claim was dismissed at summary judgment in favor of the defendants thus demonstrating that undue influence and lack of capacity are not inextricably intertwined.
With special guest blogger, Bryan Cave summer associate, Anne Jump.
When people create Wills and Trusts, they routinely define what constitutes a “descendant” in their estate planning documents for purposes of determining who will inherit their estates. Many include in their definition of descendant any child adopted into the family and that child’s descendants. (For a discussion on issues relating to adult adoption, see our prior post, “Girlfriends Come and Go, but Daughters are Forever: the Case for Adult Adoption”.)
But what happens when a descendant is adopted out of a family? For example, where a trust document has defined descendants to include any person adopted by a descendant, a child adopted out of a family may no longer be considered a descendant. The Supreme Court of Montana came to just such a conclusion in the recent case, In the Matter of the Cecilia Kincaid Gift Trust for George. There, the trust document specified that an adopted child was to be considered the lawful blood descendant of the adopting parent and no longer the descendant of the biological parent. Because the trust did not differentiate between children adopted into and out of the family, any adoptive child was considered the descendant of its adoptive parents under the terms of the trust. For a more detailed description of this case, see the post from our sister-blog, bryancavefiduciarylitigation.com, “Are Children Given Up for Adoption Still ‘Descendants’ of Their Natural Parents?”
Without a provision distinguishing between adoptions into and out of a family, courts interpreting a trust document may have little choice but to apply the same interpretation to both scenarios. This can lead to unintended results and is therefore worth addressing in estate planning documents.
Adoption out of a family is not uncommon. Take, for example, the case of a child whose natural parent dies. The child’s other natural parent remarries, and the stepparent legally adopts the child. Is that child still a descendant of the deceased parent? With a clause like that in Kincaid, the answer is no. The child becomes a descendant of its stepparent and is no longer a descendant of its deceased natural parent. A similar result may be reached under state law, as well. Pursuant to Missouri Code Section 474.060, for example, an adopted child becomes the descendant of its adoptive parents only.
You may wonder, why does this matter? The natural parent is already dead by the time the child is adopted, so the child would have already received his inheritance from his natural parent, right? Not necessarily. If the deceased parent created a trust that initially benefits his surviving spouse, and then passes to his descendants upon the surviving spouse’s death, depending on how the trust is written, the child adopted by his step-parent may no longer be the natural parent’s descendant. An even more likely scenario is that the child’s grandparents may want the child to inherit his deceased parent’s share under their estate planning documents. If the grandparents’ documents don’t specify that descendants who are adopted out of the family are still to be considered their descendants, the grandchild may not inherit.
To provide for all descendants, including those who may be adopted out of a family from a legal standpoint, you should discuss how to distinguish between adoptions into and out of the family in your estate planning documents with your estate planning attorney.
Tax practitioners have long believed that donations could be made to single member LLCs wholly owned by section 501(c)(3) organizations on the theory that, for tax purposes, the donation was treated as made to the charity and not the LLC. In long awaited guidance, the IRS has finally agreed in Notice 2012-52. The analysis in the notice is not surprising, and is in fact, exactly what tax practitioners have been arguing ever since disregarded entities came into existence.
Generally, a business entity that has a single owner and that is not a corporation is treated as disregarded as an entity separate from its owner. These “business entities” are typically limited liability companies. If an entity is disregarded, its operations and activities are treated in the same manner as a sole proprietorship, branch, or division of the owner, and the owner generally reports all income, loss, deductions, and credits on its own tax return. Thus, any contribution to a disregarded entity would be reported on the owner’s return as a contribution. Practitioners believed that this result meant that the donor was treated as contributing to the charitable organization, rather than the LLC, and was thus entitled to a charitable contribution deduction. Prior to the recent guidance, the IRS was unwilling to agree or disagree with this position.
On July 31, however, the IRS finally ruled that donations to a domestic single member LLC whose sole owner is a section 501(c)(3) organization will be treated as donations to a branch of the 501(c)(3) organization. Accordingly, donors will be entitled to a charitable contribution deduction. The IRS has also asked, but not required, that charities disclose in a acknowledgment or other statement to the donor that the single member LLC is wholly owned by a charity and treated by the charity as disregarded.