MSBA Section of Estate and Trust

Danielle M. Cruttenden, Chair Janet I. McCurdy, Editor Anne W. Conventry, Chair-Elect Newsletter Christine W. Hubbard, Editor Michaela C. Muffoletto, Secretary

Spring 2020 Vol. 27 No. 3

Notes from the Chair

By Danielle M. Cruttenden, Esq. McNamee, Hosea, Jernigan, Kim, Greenan & Lynch, P.A.

The word “change” is defined as the by change that we keep from falling members shared information on the act or instance of becoming different. behind. Others, like me, recognize listserve. Several MSBA members have It has been used to describe a social that to be true, but are sometimes volunteered their time in presenting movement, the purpose of which is to slower to change practices that have helpful webinars. I have witnessed bring about a positive development, an become all too comfortable. Whether the leadership and support of the improvement in the way we live our by choice or forced by events, change MSBA executive committee and its lives. However, “change” can also be is difficult! The arrival of COVID-19 staff working every single day during associated with hardship, like when we has wreaked havoc in our personal the pandemic to finds ways to help lose someone or something we love, and our professional lives forcing its members deal with these forced or are forced to adapt to a new way of uncomfortable changes in both. As in changes in our professional world. doing things because of a change in many times of crisis, it is the support health or financial circumstances. Some of our community that helps to get Never before have I been more thankful of us embrace change well, having us through. I witnessed that within for the relationship that our Section has developed the mantra that it is only our MSBA community as section (continued on page 2)

In This Issue

Practical Tips: Advising your client during a divorce...... 4 Maryland Court of Special Appeals: Tax Court Erred in Interpreting Will to Allow for Marital Deduction...... 6 Once Loved, Now Scorned: The Unwanted QPRT...... 8 Highlights from the 54th Annual Heckerling Institute on Estate Planning...... 13 Survey of General and Limited Power of Attorney Act...... 17 Notes from the Chair. . . (continued from page 1)

developed over the years with Senator Christopher West described below. By clicking on the link to each, you will of Baltimore County and Richard Montgomery, MSBA’s find the text of each of the bills, including cross-filed bills. Director of Legislative and Government Relations. Both were instrumental to having Governor Hogan’s legal counsel Disposition of Remains – Authorizing Agent. Makes review our Section’s proposed emergency legislation, which clear that the individual appointed as authorized agent on helped to form the basis of the Governor’s Executive Order for an Advance Medical Directive to make decisions as to the remote witnessing of wills, powers of attorney and advance disposition of their remains is controlling, binds the agent to medical directives. This Order, together with the Governor’s certain decisions made by the individual in other documents earlier Executive Order on remote notarization, provided and otherwise clarifies the order of priority of persons the needed relief to continue our work during the pandemic. having the right to serve as authorizing agent for a decedent. Senator West has agreed to work with our Section when http://mgaleg.maryland.gov/2020RS/bills/sb/sb0528t.pdf needed to introduce proposed legislation ratifying the terms of http://mgaleg.maryland.gov/2020RS/bills/hb/hb1229t.pdf the Governor’s Executive Order, whether in a Special Session in 2020, or during the 2021 meeting of the General Assembly. De Minimis Receipts in Closed Estates. Allows the court to enter an order permitting a check payable to the Shortly following the Governor’s Order on remote witnessing, decedent or the estate of a decedent in the amount of $1,000 the Section Council, through the efforts of Leanne Broyles, or less to be deposited into the interested person’s bank Jonathan Lasley, Lynn Sassin and David Sessions, presented account for purposes of distributing the funds in a certain a webinar “Brave New World: Remote Execution of Estate manner. This relief is only available in a closed estate in Planning Documents.” More than 500 registered for the which the appointment of the personal representative has program and the YouTube video has had more than 2700 views been terminated, avoiding the filing of a new petition for as of this writing. Also, an article by Elsa Smith explaining the probate. Other limiting circumstances are also applicable. Governor’s Order appears on COVID-19 Emergency and the http://mgaleg.maryland.gov/2020RS/bills/sb/sb0151t.pdf Estate & Trust Section’s pages of the MSBA website. There http://mgaleg.maryland.gov/2020RS/bills/hb/hb0543t.pdf too, you will find templates for the Supervising Attorney Certifications that must be attached to remotely witnessed Appeals from Orphans’ Court. Requires an appeal Wills, Powers of Attorneys and Advance Medical Directives. from a final judgment of an orphans’ court to be made by filing a certain notice, rather than a certain order (which Our Section was fortunate that, despite the shortening of the is already the practice), and extending from 30 days to legislative session, three of our four bills passed both house 60 days the standard period of time within which the chambers and one will go to summer study. The Section also register of wills must transmit all pleadings and order of supported with amendments a change concerning Maryland the proceedings to the court to which the appeal is taken. estate tax portability and the release of trustees from liability http://mgaleg.maryland.gov/2020RS/bills/sb/sb0149t.pdf under certain circumstances. While more details on these http://mgaleg.maryland.gov/2020RS/bills/hb/hb0247t.pdf bills will be presented in a future CLE, they are briefly (continued on page 3)

2 Notes from the Chair. . . (continued from page 2) Claims against Estate of Maryland Medical Assistance Consumer Protection - HB 304 addresses unfair, abusive Program Recipient. This bill aimed to firmly establish the or deceptive trade practices that exploit vulnerable adults. date by which a claim must be filed against an Estate by http://mgaleg.maryland.gov/2020RS/bills/hb/hb0304t.pdf the Maryland Department of Health for Medicaid benefits received by the decedent. This matter will go to summer study. Senior & Vulnerable Adult Asset Recovery Unit There is a case on appeal in which this issue has been argued. – SB 407 would establish an asset recovery unit in http://mgaleg.maryland.gov/2020RS/bills/sb/sb0150t.pdf the office of the Attorney General for protecting http://mgaleg.maryland.gov/2020RS/bills/hb/hb0393f.pdf senior and vulnerable adults from financial crimes and authorizes the unit to bring civil actions for damages Maryland Estate Tax Portability. This bill was introduced against certain persons committing financial crimes. by the Comptroller’s office. Our friendly amendment builds http://mgaleg.maryland.gov/2020RS/bills/hb/hb0407t.pdf in the same relief granted by the federal Rev. Proc. 2017- 34, which is to allow a 2-year extension to file an estate Advocating for legislation that improves estates and trusts tax return for the sole reason of electing portability. The laws for the citizens of Maryland and the lawyers that serve bill also clarifies that Maryland portability does exist for them, and monitoring other legislation for potential problems estates of a predeceased spouse who died before January requiring action, is a significant part of the Section Council’s 1, 2019, and in which no Maryland estate tax return was work each year. In order to do this work effectively, the required to be filed, so long as a federal estate tax return legislative committee of the Section Council is required electing federal portability was filed. Finally, the bill to work quickly and responsively during the legislative allows the Comptroller to examine the DSUE reported on session of the General Assembly. It is for this reason that the MET of a first spouse after the limitations period for the Section Council became alarmed upon learning of the sole purpose of determining the validity of the DSUE a proposed bylaws change by the Board of Governors reported on the MET of the surviving spouse, however, no that would move the Section’s right of expression on additional tax may be assessed outside the limitations period. legislative matters out of the bylaws and into the MSBA http://mgaleg.maryland.gov/2020RS/bills/hb/hb0219t.pdf policy manual. I want to sincerely thank the many of you who answered the call this past February and sent in their Maryland Trust Act – Liability of Trustee. Brought by the proxies, which resulted in the Board of Governors’ decision Maryland Bankers Association, this bill deems an interested to reconsider the proposed bylaws change. I am grateful to person to have released a Trustee from liability upon the sending MSBA President Dana Williams for appointing me to the of a certain notice and reports to the interested person to which MSBA’s Bylaws Committee as a section representative, the interested person makes no objection within 90 days. allowing me to participate in further consideration http://mgaleg.maryland.gov/2020RS/bills/sb/sb0886t.pdf of the proposed bylaws changes. Upon conclusion of http://mgaleg.maryland.gov/2020RS/bills/hb/hb0904t.pdf the committee’s work, I will report back to everyone.

Also on the legislative front, our Section, together with the It has certainly been a busy year, with much more happening Elder Law and Disability Rights Section of the MSBA, than reported here. It has been an honor and privilege to serve formed a task force to address the growing concerns as the Chair of this Section. I hope that each of you, your surrounding the exploitation of vulnerable adults. During family and co-workers have and will continue to remain safe the 2020 legislative session the task force consulted with from the coronavirus. I look forward to the day in which we individual legislators and supported three criminal law will have the option to attend continuing legal education bills at hearings and otherwise. These three bills, briefly courses and to meet at dinners, programs and net-working described below, passed both houses and will be going events in person. Technology has become an even greater to the Governor for signing. If signed, these bills should convenience that we have come to depend upon during have a real impact in protecting our vulnerable adults. this pandemic. Still, technology is no substitute for the professional and friendly connections we make with each Abuse or Neglect of a Vulnerable Adult – HB 33 adds “severe other that come only from being in the physical presence of emotional distress” to the definition of abuse and addresses one other. For now, however, I will be happy to have the means cases where a vulnerable adult is harmed psychologically to stay connected via webcam and will continue to follow the as a result of cruel or inhumane treatment or as a result of 6 feet social distancing rules when out and about. Stay safe. a malicious act under circumstances that indicate that the vulnerable adult’s health or welfare is harmed or threatened. http://mgaleg.maryland.gov/2020RS/bills/hb/hb0033t.pdf

2 3 Practical Tips: Advising your client during a divorce By: Sarah J. Broder, LL.M. (Taxation), Attorney at Law

Most of the time, estate planning attorneys spend their time since paying alimony is no longer a tax-saving measure.1 trying to execute a family estate plan, not just an individual estate plan in isolation. Doing so necessarily requires that That being said, it makes the most sense for the estate spouses work together and they are usually on the same page planning attorney to coordinate with the client’s divorce about the disposition of their assets at their respective deaths. attorney to ensure that they are on the same page with respect to the client’s goals both during and after the Not surprisingly, if those couples decide to get divorced, that divorce process. If the client has not sought counsel from meticulously curated estate plan will need a complete makeover. a divorce attorney at the time he or she consults with you, But, how should estate planning attorneys begin that process? the divorce consultation might be the best place to start.

The first problem lies in the ethical dilemma that such a It is also valuable for the client to seek insight from a situation presents. As we know, if an attorney represents a Certified Public Accountant (“CPA”) or other financial couple for their estate planning needs, there is no attorney- advisor, who can view the entirety of the assets available client privilege that exists between the attorney and one client in the marital estate and help determine what financial to the exclusion of the other. That said, if a client couple arrangements would be most practicable while navigating informs you, as their attorney, of their impending separation marital property, alimony and elective share laws. Although or divorce, my first suggestion is to promptly advise them many clients have financial advisors with whom they have to retain new and separate estate planning attorneys. worked for many years, if your client has used such an advisor jointly with his or her spouse, he or she should However, for purposes of this article, let’s assume that you, as retain the services of a new advisor. In my days as a divorce the estate planning attorney, have an individual estate planning attorney, I often saw conflicts that arose in those situations, client who is contemplating separation or divorce from his or since the financial advisors used during the marriage often her spouse and there are no ethical issues that prevent you feel obligations towards both parties equally and do not feel from advising this individual. In that case, there are a few comfortable concealing information from one of the spouses. topics that you should incorporate into your initial meeting: It is important to be aware that there are financial planners 1. Refer to the appropriate professionals who specialize in divorce and can be very helpful in assisting At death, a surviving spouse may be entitled to much more a client with financial planning post-divorce. A word of property in the marital estate than what would be considered caution, however, concerning the spousal support and marital “marital property” in a divorce case (see §§ 8-201 et seq. property division plans that many of these financial planners of the Family Law Article, Annotated Code of Maryland). generate. These advisors are not family law attorneys and are not necessarily well versed in the law’s criteria concerning The idea of spousal support is also different from a divorce an award of spousal support or an equitable division of perspective than it might be from an estate planning marital assets, which can sometimes yield skewed results perspective. For example, the factors that a Court considers when viewed in a vacuum. These advisors work best in in determining an award of alimony might differ from a tandem with family law and estate planning attorneys to family’s decision on how to divide the marital estate between create a global plan for a client both during and post-divorce. the economically dependent and independent spouses and the parties’ children or other relatives. There are also different 1 In other words, prior to the Tax Cuts and Jobs Act of 2017 (“TCJA”), the payor tax implications to consider, since estate planning attorneys of alimony was entitled to take a dollar-for-dollar tax deduction on the amount are often trying to minimize their client’s tax burden and of alimony paid, whereas the recipient of the alimony was required to report it as taxable income. With the TCJA, alimony is no longer tax-deductible and similarly there are fewer ways to do that now with a pending divorce, does not count as income to the payee. See Tax Cuts and Jobs Act, Pub. L. No. 115- 97, § 11051, 131 Stat. 2054, 2089-90 (2017). (continued on page 5)

4 Practical Tips. . . (continued from page 4) 2. Revoke current Powers of Attorney and Advance B. Life Insurance Directives Another way to divert some of the client’s assets away This advice is often overlooked by family law attorneys, from the surviving spouse is to name close family but it should be a regular part of your practice as an estate members (or a charity, if the client is so inclined) planning attorney with a client who is contemplating divorce. as beneficiaries of life insurance policies. If done correctly, the proceeds of said life insurance would not Not only should this be the first thing you do with a client in be included in the estate subject to his or her surviving that position, but you should also quickly have them execute spouse’s elective share. new powers of attorney and advance directives to ensure that the spouse does not end up acting as an agent on your In order for this strategy to be successful, several client’s behalf by default under existing statutory provisions. requirements must be satisfied. First, the policy must insure the client’s life. In addition, the policy must 2. Address issues raised by new spousal elective share be payable to or for the “exclusive lifetime benefit law of an ancestor, a descendant, a step-descendant, or a A. Spousal Benefits sibling of the decedent” and must have been either (1) As we all probably know by now, the new spousal premarital; (2) purchased more than 5 years before elective share law (effective on October 1, 2020) is decedent’s death; or (3) his or her spouse consents to aimed at limiting a spouse’s power to disinherit his or the change (which may be a good tactic if the client her surviving spouse. One of the ways in which the law names his or her children as beneficiaries).See § aims to accomplish that goal is by requiring that the 3-404(b)(10) of the Estates & Trusts Article. surviving spouse receive sufficient “spousal benefits,” as they are defined in the new version of § 3-401(n) of C. Suggest Alternatives: Post-Nuptial or Separation the Estates & Trusts Article. Agreements For the client who feels uneasy about the finality of a There are still ways to minimize the damage to the divorce, but is unhappy in his or her marriage, a post- distribution of your client’s estate during a separation nuptial or separation agreement might be a good first or pending divorce. For example, in preparing the step. client’s estate plan, aim to ensure that the surviving spouse’s “spousal benefits” will consist of marital Post-nuptial and separation agreements are two types of property rather than non-marital property. contracts between spouses. Post-nuptial agreements are aimed at improving or preserving existing marriages, Marital property, as it is defined in § 8-201(e)(1) while separation agreements aim to divide the parties’ and (2) of the Family Law Article, is “the property, marital assets in contemplation of the end of a however titled, acquired by 1 or both parties during the marriage. marriage” including, “any interest in real property held by the parties as tenants by the entirety unless the real Well-drafted post-nuptial and separation agreements property is excluded by valid agreement.” On the other almost always include a complete waiver of spousal hand, non-marital property is property “(i) acquired elective share rights, which can assist your client in before the marriage; (ii) acquired by inheritance or gift overcoming the requirement of “spousal benefits” from a third party; (iii) excluded by valid agreement; under the new spousal elective share law (effective or (iv) directly traceable to any of these sources.” See § October 1, 2020). 8-201(e)(3) of the Family Law Article. Although it was referenced earlier in this article, it Based on that definition, if at all possible, it would be cannot be stressed enough that the client’s goals should beneficial for the client to bequeath to his or her spouse be evaluated from multiple angles (i.e., divorce, finance/ an asset acquired by the client during the marriage taxation and estate planning) before executing any to satisfy the “spousal benefits” requirement in the documents or plans. Working with a client’s advisors elective share statute. The marital property your client as a team will generally yield the best results. chooses should not be property he or she owns jointly with his or her spouse, however, as that property does not qualify as a “spousal benefit.”See § 3-401(n)(1) of the Estates & Trusts Article.

4 5

(continued on page 6) Maryland Court of Special Appeals: Tax Court Erred in Interpreting Will to Allow for Marital Deduction By Mary F. Lundstedt, Esq., and Leanne F. Broyles, Esq.

A recent Maryland Court of Special Appeals (the Court) Representative failed to respond to any of the notices. decision reiterates the importance of using carefully drafted and up-to-date language in estate planning documents, The Orphans’ Court approved the Estate’s “Second and such as the will at issue in Comptroller v. Estate of Meyers, Final Administration Account,” which showed an estate Sr. 1 Here, the estate’s failures to file a timely estate tax value just over $3 million, with approximately $2.8 return and to respond to a series of Comptroller notices million remaining after expenses. About $2.1 million of ultimately resulted in the Comptroller’s assessment of that remainder was distributed to the wife’s estate and significant taxes, interest and penalties—without allowing $754,766.50 was distributed to one of the decedent’s sons. a marital deduction. Emphasizing that the actual language In June of 2016, the Comptroller assessed taxes, interest and of the will controls—not an inferred intent from the will’s penalties based on the January 2014 Inventory showing $3.2 terms, and certainly not the tax laws in force at the time million of estate assets. Thereafter, the Estate appealed the of death—the Court found that the Tax Court erred by Comptroller’s assessment to the Maryland Tax Court. The Tax interpreting the will to allow a marital deduction, resulting Court held that: (1) the $2.25 million distributed to the wife’s in no estate tax liability. Notably, the Court also found that: estate was allowable as a marital deduction per the terms of (1) the Tax Court failed to sufficiently explain its decision the decedent’s will; and (2) the Estate did not owe estate taxes; regarding penalties and interest, and (2) the estate has the and the assessment of interest and penalties would not be burden to either establish reasonable cause to waive interest upheld. The Circuit Court for Baltimore County affirmed the and penalties or prove error on the Comptroller’s part. Tax Court’s decision, remanding with instructions for the Tax Court to value certain assets and include them in the Estate. Facts The decedent, William Meyers, Sr., died testate in The Comptroller appealed to the Maryland Court of Special December of 2012, survived by his wife and two adult Appeals, arguing that under the terms of Decedent’s will, children. Approximately three months after his death, the the $2.25 million was not distributed to the wife as a Personal Representative of his estate (the Estate) filed his bequest; rather, it passed to a residuary trust2 established will dated June 3, 2009 with Baltimore County’s Register by the will and therefore did not qualify for the marital of Wills. deduction. Additionally, the Comptroller argued that the assessment of penalties and interest was proper. In January of 2014, an inventory was filed with the Register of Wills, indicating that the Estate’s value was Applicable Law and Analysis just over $3.2 million, consisting of stock and real estate. The primary dispute was whether the Estate was able to The decedent’s other assets were owned with his wife claim the $2.25 million that ultimately was transferred as tenants by the entireties. The decedent’s wife died to the Wife as a marital deduction against the Decedent’s about one year later, leaving assets worth approximately gross estate. If allowed, the decedent’s taxable estate $2.25 million to be distributed through her estate. for Maryland estate tax purposes would fall below the $1 million exemption threshold effective at his death. The Personal Representative did not file a Maryland Estate Tax As such, the Estate would have no estate tax liability. Return. Following the filing of the inventory, the Register of Wills provided the Comptroller a partial copy of a docket sheet Citing Bandy v. Clancy3 , the Court first for the Estate. Over the next two years, the Comptroller sent clarified that “gross estate” refers to: three different types of notices to the Personal Representative the total dollar value of all property and assets in about the “missing” Maryland estate tax return. The Personal which an individual had an interest at the time

1 No. 2540, 2 (Md. Ct. Spec. App. Feb. 7, 2020) (Court added emphasis in original). (continued on page 7)

6 Marital Deduction. . . (continued from page 6)

of the individual’s death. Federal estate taxes are outside of this, my Will, after allowing for the unified assessed on the basis of the taxable estate, which is credit against the Federal Estate Tax and the State Death the gross estate minus any allowable deductions.4 Tax Credit (if use of this credit does not increase the State Death Taxes paid) reduce[s] to zero the Federal The Court continued to explain that according to Comptroller Estate Tax payable by my estate. It is my intention to of the Treasury v. Taylor, in Maryland a gross estate is use the maximum amount of any unified credit to fund comprised of two parts: the federal gross estate (determined the RESIDUARY TRUST as long as and provided by the IRS), plus any property apart from the federal gross that my estate is not required to pay any Estate Tax. estate which is included in Tax-Gen. §7-309(b)(6).5 The It is my intention to use the maximum amount of Court noted that only the first part was at issue in this case. any unified credit to fund the RESIDUARY TRUST as long as and provided that my estate is not Considering the marital deduction, the Court again cited required to pay any Estate Tax.7 (emphasis added). Bandy, which provides that the marital deduction is generally “the full value of all property in the gross estate that passes A. Interpreting Item V of the Will from the decedent to a surviving spouse, provided that the Clarifying that the Court must consider what the terms interest passing to the spouse does not terminate or fail.”6 of the will express—not the intent the terms may suggest,8 the Court interpreted Item V as establishing Agreeing that the decedent’s federal taxable estate value a marital bequest to Wife, calculated as follows: would be equal to the Maryland federal taxable estate value, the “amount equal to the lesser of” (1) the maximum marital the Court emphasized that in 2012 (the year Decedent deduction available to [Estate] (less the value of other died), the exclusion amounts for federal and Maryland property interests that passed to his wife, if any) and (2) estate taxes were different. Specifically, $5.12 million of the lowest amount which would reduce to zero the Estate’s a taxable estate was exempt from federal estate taxes, but federal liability (after “allowing for” certain credits).9 only $1 million was exempt from Maryland estate taxes. In contrast, the Court pointed out that the Tax Court had not As such, the Estate’s $3.2 million value, even without applied that formula; instead, the Tax Court seemed to have application of the marital deduction, owed no federal focused on the last sentence of Item V and inferred an intention estate taxes, because it was clearly less than the federal on Decedent’s part to establish a marital bequest that was eligible exclusion amount of $5.12 million. However, without the for a marital deduction. marital deduction, the Estate owed Maryland estate taxes because the value of the taxable estate exceeded $1 million. Accordingly, the Court indicated that the Tax Court should reconsider the Item V language, as written, Significantly, according to the Court, whether the marital assign a final value to the Item V marital bequest deduction was allowed “hinged” on whether that amount and calculate the Estate tax owed therefrom. passed to the Wife (or to the Residuary Trust) as a bequest under the following provision (Item V) in Decedent’s will: Thus, the Court: (1) reversed the circuit court’s affirmance; (2) remanded the case with instructions to vacate the If my beloved wife, […], survives me, I give to her an Tax Court’s order; and (3) remanded to the Tax Court for amount equal to the lesser of (1) the maximum marital further proceeding in accordance with the Court’s decision. deduction available to my estate, less the value of all other property interests which qualify for the marital B. Insufficient Explanation of Interest and Penalties deduction and pass or have passed to my said wife Decision and Failure to Use Reasonable Cause Standard either under provision of this, my Will, or in any manner The Court stated that it was unable to “meaningfully” review outside of this, my Will; and (2) the lowest amount, if the Tax Court’s decision regarding interest and penalties, any (including zero) which, when added to the value of because the Tax Court failed to explain the decision and all other property interests which qualify for the martial reasoning used. Furthermore, the Court observed that once deduction and pass or have passed to my wife either the Item V value is recalculated on remand—the appropriate under another provision of this, my Will, or in any manner 7 Id. at 4. 8 Citing Pfeuer v. Cyphers, 397 Md. 643, 648 n.5 (2007). 9 Id. at 15. 4 Comptroller v. Estate of Meyers, Sr. at 2 (Court added emphasis in original). 5 465 Md. 76, 89 (2019). 6 Comptroller v. Estate of Meyers, Sr., at 3, citing Bandy, 449 Md. at 610 (citing 26 U.S.C. §2056). (continued on page 8)

6 7 Marital Deduction. . . (continued from page 7) interest and penalties calculation may or may not be affected. both vacate the Tax Court order and remand the case for additional proceedings consistent with the Court’s decision. The Court explained that, per Frey v. Comptroller of Treasury10 and Comptroller of the Treasury v. Taylor11, the Tax Court Conclusion is authorized to waive interest and penalties for reasonable Again, language must be carefully drafted in estate cause. Importantly, though, the Estate has the burden to planning documents and updated to reflect changes in provide affirmative evidence that such reasonable cause exists, relevant laws, to ensure that an individual’s intentions or that there was clear error in the Comptroller’s assessment. are legally fulfilled without being subject to various interpretations. Furthermore, filing estate tax returns timely Finding no indication in the record that the Tax Court and responding to tax authorities’ follow up inquiries used the reasonable cause standard, the Court reversed and notices may stymie accrual of penalties and interest. the circuit court’s order on this issue and remanded to

10 422 Md. 111, 29 A3d 476 (2011). 11 465 Md. 76, 213 A.3d 629 (2019).

Once Loved, Now Scorned: The Unwanted QPRT

By: Jeffrey S. Glaser, Esq. Saul Ewing Arnstein & Lehr LLP

I. A Brief Background of the QPRT. authorized as an exception to the general rule under § 2702.4 Since 1990, the Qualified Personal Residence Trust (“QPRT”) has been a powerful estate planning tool that allows a donor A QPRT is structured so that the transferor retains the right to transfer a residence to a family member while retaining to occupy the residence for a period of years. When that the right to live in the home for a fixed period of time. A term ends, the interest held by the remainder beneficiary QPRT is a special type of a grantor retained income trust. (typically the transferor’s children) becomes possessory. The use of grantor retained income trusts as a planning The value of the gift is determined by the subtraction tool for transferring an asset to a family member was method: the actuarial value of the transferor’s retained significantly limited in 1990 when § 2702 of the Internal interest is subtracted from the value of the residence at the Revenue Code (the “IRC”) was adopted. Under § 2702, a time the QPRT is funded. The value of the retained interest retained interest in trust is valued at zero when the remainder is determined by the transferor’s age, the length of time beneficiaries are members of the transferor’s family.1 the transferor retains the right to occupy the residence, and But IRC § 2702 created two exceptions: the transfer of a interest rates then in effect, as provided under IRC § 7520. residence,2 and the transfer of an asset in which the transferor retained a “qualified interest”.3 A QPRT is the form of trust For example, assume a donor, age 60, owns a home with a value of $500,000, and establishes a QPRT with a 15 year term in June, 2001, when the 7520 rate is 6%. The value of 1 A “member of the family” is defined as (i) the transferor’s spouse, (ii) any ancestor or the transfer for gift tax purposes is $147,440. If the home descendant of the transferor and any spouse of such ancestor or descendant, (iii) any ancestor or descendant of the transferor’s spouse and any spouse of such ancestor or appreciates 2.5% each and every year, when the 15 year term descendant, and (iv) any sibling of the transferor. IRC § 2704(c)(2). 2 Treas. Reg. § 25.2702-5. 4 3 The requirements of a QPRT are described in Treas. Reg. § 25.2702-5(c). A similar A “qualified interest” is one in which the transferor retains the right to receive a fixed trust allowable under § 2702, known as a Personal Resident Trust (“PRT”), is amount at least annually, based upon a fixed percentage of the trust assets. Qualified described in Treas. Reg. § 25.2702-5(b). A significant difference between the two interests come in two flavors: annuity interest and unitrust interest. An annuity trusts is the ability to sell the residence during the transferor’s retained term. A PRT interest is generally determined one time, using the initial fair market value of the prohibits sale of the residence during the retained term whereas a QPRT does not trust assets. Treas. Reg. § 25.2502-3(b). A unitrust interest is generally determined impose such restriction. See Treas. Reg. § 25.2702-5(b)(1). As a result, the QPRT is annually using the fair market value of the trust assets as determined each year. much more common. Treas. Reg. § 25.2502-3(c). (continued on page 9)

8 Unwanted QPRT. . . (continued from page 8)

ends in 2016, the value of the home will be approximately 2036(a)7 and the taxable gift when the residence was gifted $724,000. If the donor survives the full 15 years, the donor is excluded from the estate tax calculation.8 These appealing will have removed approximately $724,000 from donor’s characteristics have made the QPRT a popular planning tool. taxable estate at the cost of using only $147,444 of gift tax exemption. Assuming a combined federal and Maryland II. After the Retained Term Ends. estate tax rate of 50%, this is an estate tax savings of A QPRT typically contains provisions for the donor’s approximately $288,000,5 and every additional dollar of continued use of the residence after the retained term ends. appreciation results in an estate tax savings of 50 cents. 9This raises the issue whether the residence is fully removed from the donor’s estate if the donor continues to reside in it after A QPRT accomplishes a number of objectives, such as the term ends. While the Regulations under § 2702 contain the transfer of an asset at a highly discounted value for very specific and extensive provisions that must be included gift tax purposes6 and the transfer of an asset that does not in a QPRT during the donor’s retained term, neither § 2702 generate cash flow needed to support the donor’s lifestyle. nor the Regulations under § 2702 address circumstances after Moreover, there is virtually no risk that the donor wastes the retained term ends. That is because § 2702, and frankly use of transfer tax exemption: if the donor dies during the all of the special valuation rules under Chapter 14, concern term, it is as though the gift never occurred because the only the valuation of a gift under specific circumstances. residence is included in the donor’s estate under IRC § 7 The value of the entire QPRT is included in the donor’s estate under IRC § 2036. See

5 Treas. Regs. § 20.2036-1(c)(1)(ii) Ex. 2; § 20.2036-1(c)(2)(i), and § 20.2036-1(c) The estate tax savings is calculated as follows: If nothing were done, the home with (2)(iv) Ex. 6. The IRS has made clear that the value included in the donor’s estate is value of $724,000 would generate an estate tax of $362,000. But the home was not not the value of the remaining income interest under IRC§ 2039. See Treas. Regs. § removed without consequence. The $147,444 taxable gift is added back to the estate 20.2039-1(e) and § 20.2039-1(f). to determine the estate tax. At a 50% rate, the estate tax on $147,444 is $73,722. 8 The flush language of IRC § 2001(b) states that an adjusted taxable gift does not The difference between the two estate tax calculations is the savings. $362,000 – include a gift includible in the donor’s estate. $73,222 = $288,788. The greater the value of the home at the time of death, the 9 Many QPRTs also include special provisions that allow the donor’s payment of rent greater the estate tax savings. If the home is worth $819,000 at the time of death, the to be tax-free “gifts” to the children (the remainder beneficiary) after the retained estate tax savings is slightly less than $367,000. 6 interest ends. By structuring the remainder interest as a grantor trust with respect Changes in each of the variable inputs that determine the taxable gift affect the to the transferor, the donor’s payment of rent after the retained term ends is neither calculation. For example, keeping other variables constant, a relatively higher taxable income to the remainder beneficiary nor a taxable gift by the donor. interest rate increases the discount, thus reducing the taxable gift, because the actuarial value of the transferor’s retained interest increases. (continued on page 10)

8 9 Unwanted QPRT. . . (continued from page 9)

The circumstances that exist after the retained term ends are When an asset is transferred by gift, the donee’s basis is critical to evaluating the estate tax consequences. Unlike equal to the donor’s basis at the time of the transfer.12 Thus, other assets that can be gifted during life, the donor does upon creation of a QPRT, the donor’s basis in the residence not simply stop using his residence prior to death unless the carries over to the QPRT. If the residence in the QPRT is donor moves to a residence owned by someone else (such as not included in the donor’s gross taxable estate at his death, a child’s home). This matters because if the donor transfers the income tax basis of the residence is not adjusted to fair title to an asset prior to death and continues to use it, the asset market value when the donor dies.13 Consider that a QPRT is is included in his estate at death under IRC § 2036(a)(1).10 often funded with a residence purchased many years earlier, so the unrealized appreciation at the time of funding is often With a QPRT, the donor transfers a residence for a specified large. Consider further that the real estate market has seen term. If the donor continues to reside in the QPRT after significant appreciation over the years, and consequently, the term ends, there is a risk that the residence is included the unrealized appreciation of a residence in a QPRT when in the donor’s estate. This would necessarily defeat the the retained term ends is likely even more pronounced. objective of removing the residence from the donor’s estate. But the broad sweep of inclusion under § 2036(a)(1) The nature of a residence is that it is often retained until death, can be avoided. The parenthetical provision of the statute and sold after death. In the absence of a basis adjustment provides an exception if there is payment of “adequate under IRC § 1014, the gain on sale after death would likely and full consideration in money or money’s worth.” be significant.14 Consequently, a home currently held in a QPRT in which the donor’s retained interest has expired may, In the context of a QPRT, if the donor continues to reside in the in fact, be a ticking tax time bomb ready to explode after the residence after the retained term ends, the general consensus donor dies.15 If the donor’s estate is already subject to federal among practitioners is that the donor must pay fair market and Maryland estate tax, keeping the home excluded from rent to the remainder beneficiary to avoid inclusion of the the estate tax is undoubtedly preferable to inclusion of the residence in the donor’s estate, and fit within the parenthetical home in the estate under current estate tax and income tax exception of § 2036(a)(1). The payment of fair market rent rates.16 If the donor’s estate is not currently subject to estate triggers the bona fide sale for adequate and full consideration tax, but would be by forcing the home back into the estate, exception.11 Accordingly, a well-drafted QPRT will require the keeping the home excluded may or may not be preferable to donor to pay fair market rent to the remainder beneficiary for including the home in the estate. In such a case, it is critical the continued use of the residence after the retained term ends. to evaluate which of the two taxes is the lesser evil to pay. If the home were to be included in the donor’s estate and Over the past number of years, the federal and Maryland no federal or Maryland estate tax would result at death, estate tax exclusion amounts have grown, in both relative inclusion of the home is undoubtedly preferable to exclusion. and absolute terms, and for many clients federal and Maryland estate tax is no longer a concern. For many Could a client whose term interest in a QPRT has ended, clients who utilized QPRT planning in past years, the estate and who continues to live in the home, have a retained tax benefits of the QPRT no longer exist and the QPRT interest under § 2036? Some practitioners say “yes”, and no longer serves a purpose. While it may seem rather argue that a client who simply continues to occupy the innocuous to acknowledge that prior estate tax planning residence without paying rent, or by paying less than is no longer helpful, for clients who no longer have estate 12 IRC § 1015. tax concerns there is a more sinister aspect to the QPRT. 13 See IRC § 1014. 14 The capital gain exclusion for a principal residence of $250,000, or $500,000 That is because an old and cold QPRT may actually for a married couple, requires the residence be owned by the taxpayer and used result in a tax cost, and perhaps a significant one at that. as his or her principal residence for 2 out of the 5 years prior to sale. IRC § 121. These requirements make it difficult for an heir of the decedent to qualify for the exclusion. 15 If the transferor dies before the retained term ends, the residence is includible 10 “The gross estate shall include the value of all property to the extent of any interest in estate under IRC § 2036. QPRTs often include a reversionary clause, which therein of which the decedent has at any time made a transfer (except in the case of provides that if the transferor dies before the retained term ends, the residence is a bona fide sale for adequate and full consideration in money or money’s worth), distributed to the transferor’s estate. Although this reversionary clause affects the by trust or otherwise, under which he has retained for his life or for any period not gift tax value by increasing the valuation discount when the gift is made, it does not ascertainable without reference to his death or for any period which does not in fact affect inclusion under IRC § 2036. In other words, if the transferor dies before the end before his death, (1) the possession or enjoyment of, or right to income from, retained term ends, the residence is included in the transferor’s gross taxable estate, the property….” IRC § 2036(a)(1). regardless of whether the QPRT has a reversionary clause or not. 11 A transfer is not subject to § 2036(a) “if made, created, exercised, or relinquished” 16 The combined federal and Maryland estate tax on the entirety of the value (the in a bona fide sale for adequate and full consideration in money or money’s worth. combined rate is approximately 50%) is necessarily higher than the combined Treas. Reg. § 20.2043-1(a). “To constitute a bona fide sale for an adequate and full federal and Maryland income tax on the gain (the combined rate is approximately consideration in money or money’s worth, the transfer must have been made in 32%), even if the income tax basis is zero. good faith, and the price must have been an adequate and full equivalent reducible to a money value.” Id. (continued on page 11)

10 Unwanted QPRT. . . (continued from page 10)

fair market rent, causes the home to be included in the inclusion, introduces a twist to the simplistic fact pattern of Rev. federal gross estate by triggering the retained interest Rul. 70-155: changed circumstances after the time of transfer. rules of § 2036. This argument deserves to be explored. If changed circumstances form the basis of the agreement or understanding on which the retained interest is alleged, III. Intersection Between a QPRT and § 2036(a)(1). there is no retained interest for purposes of § 2036(a)(1). To this author’s knowledge, no court has adjudicated whether the simple failure to pay rent or payment of less than fair Instructive on this point of changed circumstances is Estate of market rent causes inclusion of a home held in a QPRT Barlow v. Commissioner,20 in which the decedent conveyed under § 2036. Similarly, the IRS has not directly ruled on tracts of his farm to his children in 1957. For two years, the this issue. The elements of § 2036(a)(1) are: (i) a transfer decedent collected rent from the farm and transferred the by the decedent; (ii) of an interest in property; (iii) in which rent to his children. Beginning in 1959, however, a series the decedent has retained; (iv) possession or enjoyment of, of events drastically changed the family circumstances and or right to income from, the property.17 A donor who at the led to financial difficulties for the decedent. As a result, the time of death lives in a home previously transferred to a decedent and his children reached an understanding: the QPRT easily satisfies elements (i), (ii) and (iv). It is element decedent would withhold the rent and pay amounts owed (iii) that creates uncertainty. In this author’s view, however, to his children after his circumstances had improved. But failure to pay rent or payment of less than fair market rent the decedent died before his circumstances improved. After does not allow the decedent’s estate to treat the decedent the decedent died, the children filed claims against the as holding a retained interest, if it suits the estate to do so. estate for rent due to them. The estate tax return excluded Whether the IRS can take this position is a separate matter. the gifted tracts of farm property from the gross estate.

The IRS has been clear that an interest is considered retained The IRS claimed the gifted property was included in the “if at the time of the transfer there was an understanding, estate under IRC § 2036(a)(1), that in substance the decedent express or implied, that the interest or right would later initially conveyed a remainder interest and reserved a life be conferred [on the transferor].”18 To “retain” an interest estate, as evidenced by the agreement between the decedent in the transferred property, the transferor does not need and his children. The Tax Court disagreed, finding that to hold a legally enforceable right. Simply having an the gifted property was not includible in the decedent’s understanding with the transferee that the interest is estate. The Tax Court held that § 2036(a)(1) applies “only retained is sufficient for purposes of § 2036(a)(1). where the possession or enjoyment of, or the right to the income from, the property is ‘retained’ at the time the This principle is illustrated by Revenue Ruling 70-155,19 transfer is made.”21 Section 2036(a)(1) “does not apply in which the decedent transferred title to his home to his where arrangements, not previously contemplated, are son and daughter-in-law prior to death, and continued to made after a transfer has been completed to permit the live in the home after the transfer. The IRS ruled the home transferor to enjoy the benefits of the property.”22 While an to be includible in the decedent’s estate under § 2036(a) agreement or understanding to establish a retained interest (1) because there was “an understanding by all parties at under § 2036(a)(1) may be inferred from circumstances the time of the transfer” that the decedent would continue of the transfer and the manner in which the transferred to live in the residence without paying rent. The decedent property is used, “such circumstances must show that such retained the possession and use of the residence, without agreement was made contemporaneously with the transfer.”23 interference and without demand from the son and daughter- in-law to pay the cost of using something that the decedent The interposition of a QPRT and its attendant provisions did not own. From the time they acquired title, the son changes the calculus of whether an interest can be retained and daughter-in-law did not use the home as their own under § 2036(a)(1). A QPRT necessarily requires that the residence or otherwise receive any benefit as owners of retained term must end before the donor’s death; otherwise the home while the decedent was living. Nothing changed the donor holds a retained interest from the outset and the between the time of the transfer and the decedent’s death. whole purpose of transferring the residence at a discounted gift tax value cannot be accomplished. Thus, the QPRT must A QPRT created long ago, for the purpose of excluding the provide for the retained term to end at a specified time, at home from estate tax, for which the tax laws now favor which time the remainder interest becomes possessory. After

17 The retention must be for life, or any period not ascertainable without reference to 20 55 T.C. 666 (1971). the transferor’s death, or any period that in fact ends at death. 21 Id. at 670. 18 Treas. Reg. § 20.2036-1(c)(1)(i). 22 Id. 19 1970-1 C.B. 189 (1970). 23 Id. (continued on page 12)

10 11 Unwanted QPRT. . . (continued from page 11) this time, the donor’s continued use of the home will require were sufficiently different to avoid applying the Barlow. the donor to pay fair market rent to the remainder beneficiary. As discussed above, in Barlow, the rent payments ceased Thus, a QPRT by its terms, established at the time of the because of unforeseen circumstances that arose after the initial transfer, will be contrary to any future agreement or initial transfer, not contemplated at the time of the initial understanding that the remainder beneficiary will allow the transfer. In Riese, there were no unforeseen circumstances: donor to continue to reside in the home without paying rent. the parties contemplated the retained term to end and for the decedent to continue to live in the home. Because there The terms of the QPRT were sufficient to avoid a retained were no unforeseen circumstances arising after the initial interest argument in Estate of Riese v. Commissioner.24 In transfer that would justify a failure to abide by the terms of the Riese, the QPRT provided that after the retained term ended, QPRT, the Riese court was required to inquire into the facts the home was to be transferred to trusts for the decedent’s surrounding the circumstances after the retained term ended. daughters. After the retained term ended, the decedent continued to live in the home. She paid all property taxes, For the client who continues to reside in a home he previously insurance, and other expenses during this time, but did not transferred to a QPRT in which the retained term has ended, pay rent or even enter a lease agreement. After the retained and for whom inclusion of the home in the taxable estate is term ended, the decedent’s daughters and the decedent’s sought by failing to pay fair rent, reliance on § 2036(a)(1) is a lawyer discussed how much rent the decedent should pay, but risky strategy. For these clients, today’s environment of very agreed to wait until the end of the year before entering a lease, high estate tax exemptions were clearly not contemplated determining what the rent should be, having the decedent when the home was initially transferred to the QPRT. pay back rent. The decedent died before this was done. These are, undoubtedly, changed circumstances. If these tax exemption had been contemplated, it is doubtful the The IRS argued that the home was included in the decedent’s client would have created the QPRT. As Barlow and Riese estate under § 2036(a)(1), claiming that an implied agreement make clear, when unforeseen changed circumstances arise could be inferred because nothing changed after the retained that give rise to an implied agreement or understanding, term ended. Inclusion of the home would have resulted in § 2036(a)(1) is triggered only if the implied agreement or an estate tax deficiency of about $3 million. The Tax Court understanding was in existence at the time of the initial transfer. rejected this argument, saying that the decedent and the remainder beneficiaries had agreed to pay fair market rent, the The decedent’s estate may not even be permitted to argue amount of which was to be determined and payments to begin a retained interest under § 2036(a)(1), to bring property by the end of year when the retained term ended. Essentially, previously transferred back into the decedent’s estate. the court held that the actions after the retained term ended Informally, the IRS has indicated that it may take the position were sufficient to show that the agreement originally set forth that the taxpayer cannot argue retained interest; that only in the QPRT – fair market rent payment by the decedent – the IRS can do so. This is especially the case given that the would be honored. Consequently, the residence was not taxpayer has likely reported the transfer of the home to a brought into the taxable estate under § 2036(a)(1). The Court QPRT on a gift tax return in which the value of the retained accepted the testimony that the decedent and her daughters interest is based on a term of years under § 7520. If the intended to determine rent by the end of the year, citing decedent dies after the retained term ends and the estate many facts25 that any implied agreement to remain in the claims retained interest under § 2036(a)(1), the estate is taking residence after death without paying rent was negated by an the position that at the time of the initial transfer, there was an express agreement to pay rent. The Court concludes, “There agreement or understanding to allow the decedent to retain an was no understanding, express or implied, at the time of interest for life. This amounts to the decedent’s interest being transfer that decedent could occupy the residence rent free.” a life estate, not a term of years. Under the duty of consistency doctrine, a taxpayer is prohibited from taking a position on In Riese, the estate argued that Barlow was controlling, one tax return and a contrary position on a subsequent tax and that the decedent always intended to pay rent but return, if the IRS relies on the earlier position and limitations actual payment never materialized because the decedent on the earlier return has passed.26 In other words, the duty died unexpectedly soon after the retained term ended. of consistency doctrine may be asserted to prohibit the The Riese Court found “the circumstances” of Barlow remainder beneficiary from claiming the original donor held

24 68 T.C. Memo 2011-60. a retained interest at death, if the original donor reported 25 The facts were (i) the creation of the QPRT, (ii) the payment of gift tax, (iii) the on a gift tax return the retained interest as a term interest. several instances in which decedent agreed to pay rent, (iv) the communications by the daughters to find out how to determine the amount of rent to charge, and (v) and 26 See R.H. Stearns Co. v. United States, 291 U.S. 54 (1934). the lawyer’s corroborating testimony. (continued on page 13)

12 Unwanted QPRT. . . (continued from page 12)

Take advantage of the historically high lifetime gift tax IV. What To Do with the Unwanted QPRT? exemption, and if circumstances dictate limiting the use of All of this begs the question: What should the attorney the gift tax exemption, consider gifting fractional interests in recommend if the client established a QPRT in which the home back to the donor over a period of time. Be certain the retained term has ended and inclusion of the that the remainder beneficiaries are the beneficiaries of the home in the taxable estate is preferred to exclusion? original donor’s estate, preferably as an indirect beneficiary, in order to avoid the risk of IRC § 1014(e), which results in As discussed above, there are a number of risks that may a loss of basis adjustment.27 To avoid the 1 year rule under § prevent the taxpayer from claiming a retained interest under 1014(e), the original donor should arrange his affairs so that § 2036(a)(1). Changed circumstances cannot be the basis his estate passes indirectly, and not directly, to the remainder for the understanding or agreement that gives rise to the beneficiaries. For example, if the remainder beneficiary under retained interest. The doctrine of the duty of consistency the QPRT is the original donor’s child, the donor’s Will should prohibits the estate from treating the contribution to the provide the donor’s estate passes to a trust for the child28. QPRT differently than originally reported on a gift tax return. There is also the risk that, after the retained term A client who long ago created a QPRT should be made aware ends, the remainder beneficiaries are making taxable gifts of these issues, and the tradeoffs attendant with an appreciated to the donor by allowing the donor to live in the home rent- home that passes outside the taxable estate. Otherwise, free or at below market rent. This may give rise to imputed the lawyer may have to answer to an angry beneficiary. taxable income attributed to the remainder beneficiaries. 27 If the original donor dies within 1 year after the remainder beneficiaries transfer the home to the original donor, and the home then passes to the remainder beneficiaries My advice is to avoid these risks and follow the simplest upon the original donor’s death, the basis adjustment is lost. IRC § 1014(e). and clearest path: arrange for the remainder beneficiaries 28 If the parent, as original transferor, dies within one year after the child transfers the home by gift, and if upon the parent’s death the home passes in trust for the to convey title to the home to the original donor. The child, § 1014(e) may still apply to prevent a full basis adjustment. To minimize the remainder beneficiaries should be incentivized to do so, to risk of such a result, the child’s interest in the trust should be fully discretionary. A discussion of this issue is outside the scope of this article. For an analysis, see avoid exposure to a large capital gains tax when the home Mark R. Siegel, I.R.C. Section 1014(e) and Gifted Property Reconveyed in Trust, 27 is sold. Have the home valued by a qualified appraiser and Akron Tax Journal 33 (2012). make sure the remainder beneficiaries file a gift tax return.

Highlights from the 54th Annual Heckerling Institute on Estate Planning By Meryl M. Kinard, Birchstone Moore LLC

As I suspect that nearly all of us have fully transitioned into programs this year focused on (i) grantor trusts, (ii) planning working from home or with limited office interactions and hours with life insurance, and (ii) securities law issues for estate due to the COVID-19 pandemic, it seems almost impossible planners. Attendees had the opportunity to attend sessions that, in January, 4,000 of our colleagues gathered in Orlando, following specialized tracks, such as planning with trusts, Florida for the 54th Annual Heckerling Institute on Estate international planning, business and financial assets, elder law, Planning (“Heckerling”). Yet, gather, network, collaborate charitable giving, litigation and conflict resolution and ethics. and celebrate, we did. Equally as impossible would be for this article to touch on all of the well-researched presentations, I. Recent Developments commentary and planning tips provided during the 5-day The Recent Developments Panel, this year lead by Turney Heckerling marathon, which included 3 fundamentals programs, P. Berry, Steve R. Akers and Carol H. Harrington (the 17 regular sessions, 23 concurrent special sessions, 1 bonus “Panel”), sets the tone for Heckerling. Many of the topics session and the Recent Developments and accompanying discussed by the Panel are what attendees could expect Question and Answer Panel. Heckerling’s fundamentals to hear in greater depth during the sessions. Specifically, (continued on page 14)

12 13 Heckerling. . . (continued from page 13) the Panel discussed many cases, private letter rulings and echo the Bluebook’s stance on this issue. In the absence of regulations that arose in 2019, which spanned a wide range specific guidelines on how to make such an allocation, the Panel of topics from anti-lapse considerations to valuation issues. suggested that you treat it like any other late allocation of GST exemption on a Form 709 United States Gift (and Generation- (Most Commonly Known as the) Tax Cuts and Jobs Act Skipping Transfer) Tax Return. This provides a window of (“TCJA”) Guidance opportunity to review the GST status of clients’ existing life After a solid two years of a post-TCJA planning world, insurance trusts and other irrevocable trusts that an election the Panel was finally able to discuss clear guidance issued out of the automatic allocation of GST exemption was made or by the Internal Revenue Service (“IRS”) regarding the was otherwise created prior to the automatic allocation rules. law. Although this article does not address all of such For any clients who contributed to trusts that could have GST guidance, it was largely taxpayer favorable and friendly. taxable terminations and who may not otherwise use the bonus exemption for current or future transfers, a late allocation of Anti-Clawback Regulations the client’s bonus GST exemption may be one “free” way TCJA doubled the basic exclusion amount (“BEA”) used to take advantage of the increased BEA before it disappears. to compute any applicable estate, gift and generation- skipping transfer (“GST”) taxes, until its projected sunset on State Income Taxation of Trusts December 31, 2025. For 2020, that inflation-adjusted BEA It is not often that Heckerling features a relevant United States is $11,580,000 (or $23,160,000 for a married couple taking Supreme Court case, but 2019 proved a special year in this advantage of portability). This sunsetting double is referred to regard. Indeed, in North Carolina Dept. of Revenue v. Kimberly as a “bonus” exemption. On November 26, 2019, publication Rice Kaestner 1992 Family Trust, 588 U.S. ___, 139 S. Ct. of Treasury Regulation § 20.2010-1(c) confirmed that if a 2213 (June 21, 2019), the U.S. Supreme Court unanimously taxpayer uses the bonus exemption during his or her lifetime, held that North Carolina’s taxation of an irrevocable non- it is not clawed back at the taxpayer’s death. Therefore, each grantor trust’s undistributed income based solely on the in-state taxpayer has the greater of (i) the BEA in effect at taxpayer’s residency of a trust beneficiary was unconstitutional. While this death, or (ii) the BEA previously used by the taxpayer. Given taxpayer-friendly opinion was limited, it provided some insight the current economic conditions, this may present a “super into the Court’s view of at least one insufficient constitutional bonus” planning opportunity for clients who have not yet nexus between a trust and a state’s taxing authority. The used the bonus exemption to potentially give away even more Court did not prohibit states from imposing income tax on for a lower gift tax cost. Additionally, the preamble to the trusts; rather, for a state tax to be upheld under a Due Process final regulations confirmed that, upon a taxpayer’s death, the Clause analysis, (i) there must be some minimum connection portability election of any deceased spousal unused exclusion between the state and the trust it seeks to tax, and (ii) the trust’s (DSUE) that includes this bonus exemption is preserved for income must be rationally related to the benefits provided by the surviving spouse (provided that the other portability rules the state. In reaching its decision, the Court hung its hat on are followed). However, any planner’s dream of an off-the-top the fact that the trust’s primary beneficiary could only receive use of the bonus exemption has been quashed, as Treas. Reg. distributions of trust income and principal in the discretion of 20.2010-1(c)(2)(ii) provides a clarifying example that the bonus the Trustee (a Connecticut resident) and she was never certain exemption is not applied to a gift less than the standard BEA. to receive any trust property. Interestingly, the trust at hand, Therefore, a client will need to use more than half of the inflation- which was governed by New York law, was to terminate and adjusted BEA to take advantage of the bonus exemption. be distributed, outright, to the primary beneficiary upon her 40th birthday. Prior to such termination, the Trustee exercised Allocation of Bonus GST Exemption a decanting power authorized under New York law to extend For clients who are hesitant or unable to make gifts currently the trust for the primary beneficiary’s lifetime. While this case totaling in excess of $5,790,000, there was also discussion may leave us with more questions than answers, the Panel of whether the bonus GST exemption may be allocated to suggested that advisors review the state income tax status of a taxpayer’s transfers made before the December 31, 2017 their clients’ non-grantor trusts to determine if state income effective date. An unofficial encouraging answer came from tax should be paid under protest or if a protective claim for the Joint Committee on Taxation’s “Bluebook” submitted refund should be filed with any state based on this ruling. December 20, 2018, which provides an example of such an allocation. Although the Bluebook, as the Joint Committee’s Maryland Estate Tax of Out-of-State QTIP Trusts general explanation of tax law, is not binding precedent, the In a stark reversal from a 2018 Maryland Court of Special IRS and the Treasury Department recognize it as substantial Appeals ruling, the Court of Appeals of Maryland in Comptroller authority and the preamble to the anti-clawback regulations (continued on page 15)

14 Heckerling. . . (continued from page 14) of the Treasury v. Taylor, 213 A.3d 629 (Md. July 29, 2019) Bronze Tier: “Non-Designated Beneficiaries” held that a qualified terminable interest property (“QTIP”) trust Non-designated beneficiaries include a participant’s estate, created in another state is includable in the surviving spouse’s charity or a non-qualifying trust. The SECURE Act did not Maryland taxable estate (provided that he or she is a Maryland touch this beneficiary class and the “5-year rule” (or the resident at death). The prior overruled decision in Comptroller participant’s remaining life expectancy, if the participant’s of the Treasury v. Taylor, 189 A.3d 799 (Md. Ct. Spec. App. death occurs after his or her required beginning date) is still July 25, 2018) reasoned that such an out-of-state QTIP trust was alive and well for these non-designated beneficiaries (who excluded, as no QTIP election had been made on a Maryland are often quite clearly designated as the plan’s beneficiary). estate tax return at the first deceased spouse’s death. In light of this decision, practitioners should review the estate tax return Silver Tier: “Designated Beneficiaries” of a non-Maryland predeceased spouse to determine if a QTIP Natalie calls this group the “plain old designated beneficiaries” election was made for a surviving spouse now residing in and it includes beneficiaries who do not fall into the bronze or gold Maryland and if such an election warrants further tax planning. tier. The addition of IRC Section 401(a)(9)(H) abolished lifetime distributions for this large class of designated beneficiaries and II. Planning with Retirement Benefits replaced it with a maximum 10-year deferral payout period (the As planned presentations go, Natalie B. Choate (affectionately, “10-year rule”). As the regulations remain unchanged, a qualifying “Natalie”), one of the leaders in planning for retirement “see-through” trust, as defined under Treasury Regulation § benefits, was geared up for two, one on inherited retirement 1.401(a)(9)-4, Q&A-5, will still qualify as a designated beneficiary benefits and the other on charitable giving with retirement for purposes of the 10-year rule. Note, planners should carefully benefits. However, in response to Congress’ enactment of the review old drafting language to determine if intended see-through Setting Every Community Up for Retirement Enhancement trusts continue to qualify for this treatment under the SECURE Act of 2019 (the “SECURE Act”), which affects the Act. The 10-year rule mirrors the methodology of the 5-year rule, administration of retirement plans, Natalie pivoted to which requires that all plan benefits be distributed by December provide information and answers on the effect of such act 31 of the 10th calendar year after the participant’s death, thus, and provided attendees with a “bonus” Heckerling session, effectively eleven taxable years after death (i.e., if a participant “Planning for Retirement Benefits After the SECURE Act”. dies on January 1, 2020, a designated beneficiary would be required to withdrawal all plan assets by December 31, 2030). SECURE Act All plan assets could be withdrawn in year 1, all in year 10, The SECURE Act was signed into law in a budget flurry on spread equally over 11 taxable years or any other combination December 20, 2019. The text of the SECURE Act can be found at resulting in full distribution within the applicable period. https://www.congress.gov/bill/116th-congress/house-bill/1865/ text under Division O of the “Further Consolidated Appropriations Gold Tier: “Eligible Designated Beneficiaries” (“EDBs”) Act, 2020”. The relevant provisions on retirement benefits are IRC Section 401(a)(9)(E) is amended to carve out five new found under Title IV–Revenue Provisions, Sec. 401. Modification EDBs who receive modified lifetime distributions, as follows: of Required Distribution Rules for Designated Beneficiaries. 1. Surviving spouse, who retains the ability to roll the The SECURE Act generally applies to retirement benefits inherited benefits into his or her own retirement plan, inherited from a participant dying after December 31, 2019. which provides additional opportunities to stretch distributions. Laws and regulations regarding retirement benefits have largely 2. Minor child of the participant until reaching the age of been on cruise control, as the minimum distribution rules “majority”, after which the 10-year rule applies. Note, were enacted in 1986 and supporting regulations have been this does not apply to a minor grandchild or other minor unchanged since 2002. This has afforded planners decades relatives or friends. to advise their clients on planning for retirement benefits and 3. Disabled individual. hone in on strategies to combine lifetime income tax deferral 4. Chronically ill individual. (referred to as “lifetime distributions”) with trust protection. 5. Any other individual not more than 10-years younger The SECURE Act did not replace the minimum distribution than the deceased participant. rules, it simply dropped a bomb on “stretch IRAs” by adding subsection (H) to Internal Revenue Code (“IRC”) Section 401(a) The SECURE Act left us with plenty of unanswered (9). Beneficiaries of inherited retirement plans now generally questions, particularly as it relates to EDBs and how fall into one of three tiers, which Natalie categorized as follows: to qualify for lifetime distributions under these rules, which we hope will be clarified with IRS guidance.

(continued on page 16)

14 15 Heckerling. . . (continued from page 15)

For visual learners, this chart very generally summarizes the above information:

BENEFICIARY STATUS

Disabled/ Non- Non- Minor Chronically Spouse* Designated Designated Designated Distribution Period Child Ill/ Bene. < 10 (EDB) Beneficiary Beneficiary Beneficiary (EDB) Yrs. Younger (Pre-RBD) (Post-RBD) (EBD) Beneficiary’s Life X X Expectancy Child’s Life Expectancy Until Majority, then 10-Year X Rule Participant’s Remaining Life X Expectancy 5-Year Rule X

10-Year Rule X**

*Spouse may also roll benefits into his or her own IRA. **Consider if participant’s death was post-RBD and participant’s remaining life expectancy is greater than 10 years, if so, may be permitted to use participant’s remaining life expectancy. RBD = Required Beginning Date; April 1 following participant’s 72nd birthday

Post-SECURE Act Planning Considerations Charitable Giving The significant loss of income tax deferral for many beneficiaries The SECURE Act may impact how our clients view the calls attention to the status of tax-deferred retirement assets long-term income tax implications of distributions from tax- as “big bags of taxable income”. Clients who may be the deferred retirement accounts. If a client is already charitably most affected by the SECURE Act changes are those who inclined, perhaps in a post-SECURE Act world, such client designated (i) a see-through trust (particularly a conduit trust) may be more likely to consider some charitable component beneficiary with maximizing income tax deferral (versus to planning for retirement benefits. Natalie suggested trust protection) as a primary consideration, (ii) a grandchild encouraging clients to designate a donor-advised fund (“DAF”) or young beneficiary for the sole purpose of maximizing life as the account’s beneficiary. This avoids unnecessary account expectancy distribution, or (iii) a child beneficiary but are also opening paperwork by charitable beneficiary recipients leaving assets to other beneficiaries who now may be better and provides flexibility for the client to provide on-going candidates to receive retirement assets. Clients who may be guidance to the DAF’s successor owner. Discussion of the use less affected are those who (i) own little to no retirement of split-interest trusts, such as Charitable Remainder Trusts, assets, (ii) designated a spouse or charitable beneficiary, (iii) to provide a lifetime income stream to human beneficiaries designated a child (or other individual) beneficiary without and the balance to charity may also prove increasingly long-term income tax deferral as a determining factor, or (iv) attractive to clients who are looking to maximize income designated a see-through trust for the purposes of preserving tax deferral of retirement benefits while benefitting charity. all retirement assets in trust and remain motivated by non- tax trust protections. We can guide our clients through these Updated Life Expectancy Tables considerations by identifying who are their desired beneficiaries In November 2019, proposed regulations were published in and their primary goals for the beneficiaries’ use of such funds. the Federal Register to update the 20-year old life expectancy and distribution period tables, which are used to calculate (continued on page 17)

16 Heckerling. . . (continued from page 16)

required minimum distributions from retirement accounts. 4. Beef up fiduciary duties. General fiduciary duties of a After a formal review process, final regulations are expected general partner are much lower than that of a trustee. to take effect in 2021. Natalie surmised that the updated 5. Appoint co-managers or special managers to avoid “no- tables reflect that we are all living about 1.5 years longer. no” duties, including liquidation or dissolution decisions. 6. Comply with IRC 2036’s bona fide sale for full and III. Powell Proofing adequate consideration exception. Nancy G. Henderson led a general and a special session focused 7. Have non-tax purposes for the entity, such as to preserve on analysis of the 2017 U.S. Tax Court case of Estate of Powell liquidity, vote as a block, preserve investment methods, v. Commissioner, 148 T.C. 18 (2017) (“Powell”) and practical protection from creditors (including family disputes and planning solutions to avoid estate tax inclusion under IRC divorce), prevent spendthrift behavior and encourage Section 2036 when creating family limited partnership and family harmony. similar entities (collectively, “FLPs”) for clients. The Powell 8. Operate the entity as a real business and pool assets, decision, involving the transfer of a 99% limited partner file partnership returns (even if all members are grantor interest with a 25% discount, rested on estate tax inclusion trusts), involve other attorneys and negotiate terms of its under IRC 2036(a)(2) for a transfer with a retained right to governing documents. designate possession or enjoyment of the property or the 9. DOCUMENT, DOCUMENT, DOCUMENT all of the property’s income. Henderson offered a number of the following FLP considerations, steps and reasoning and parties practical solutions to avoid Powell-like inclusion issues: involved. 1. Do not make revocable transfers. Be wary of transfers via powers of attorney and ensure that proper authority IV. Heckerling Futures exists if such transfers are contemplated, a sticking point The Heckerling stage features the most recent prior happenings, in finding inclusion in Powell. with glimmers of what the future may hold. Something tells me 2. Create voting and non-voting shares, giving the grantor that today’s lessons of the planning opportunities and challenges non-voting shares, or otherwise remove the grantor’s we are now facing with our clients and their advisors will shape ability to vote on dissolution, distributions, transfers the 55th Annual Heckerling Institute on Estate Planning, which outside the scope of permitted transferees and the ability is slated for next January. If only a crystal ball could tell us if to remove and replace the manager, or amendments that Heckerling, held in the condensed “city” that is the Orlando change such restrictions. World Center Marriott, will exist as we knew it again or when we 3. Avoid having the transferor or the transferor’s agent as will all finally be able to gather in-person. For now, we will relish the general partner (even a small interest). If an agent this memory and hope that Heckerling, as we knew it, will live or trustee is involved, an independent agent or trustee on. For now, we know that our health and that of our colleagues should also serve. and clients is of most importance. Be well and plan virtually.

Survey of General and Limited Power of Attorney Act By Michael W. Davis, Esq. David, Agnor, Rapaport & Skalney

Introduction: way the original version of the Act was sliced and diced by the In the nearly 10 years since enactment of the General and Judiciary Committee suggested major edits by future General Limited Power of Attorney Act1 (hereinafter the “Act”), Assemblies would be required to cure perceived deficiencies. it has been amended only a few times,2 mostly to address substantive changes in the law. This is surprising because the The fact is, however, that in a recent survey conducted by the Estates & Trusts Section Council of the MSBA, a total of 76% 1 Annotated Code of MD, Estates & Trusts Article, Section 17-101, et seq. of the attorneys who responded agreed that overall, the Act has 2 Amendments include the ability to have co-agents (2012); statement of caution regarding the change of beneficiary for retirement accounts (2012); gift provisions proven useful. Only about 6% gave an unfavorable response. under Section 17-203 (2012); adding powers regarding digital assets (2016); and, providing the right of an agent to take an elective share on behalf of the principal (2019). (continued on page 18)

16 17 Survey. . . (continued from page 17) Because of the 10-year lapse in time since enactment of the Act, the Estates & Trusts Section Council performed an online survey of the members of Section to determine if the Act accomplished the goals it intended to achieve, and what, if any, amendments should be considered to update the provisions of the Act. This survey was run from late August through mid- September 2019, and was sent online to all of the members of the Estates & Trusts Section who are members of its listserv.

Background: A total of 90 attorneys responded, of whom 75% indicated that more than half of their practices was devoted to estate planning practitioners to insure that their statutory form is “substantially and related areas of practice. A total of 65, or about 72%, in the same form” as the form found within the statute, there is of the respondents have been in practice for more than a concern about how much can or should be included within the 10 years, with a majority (53) practicing in firms of three Special Instructions to avoid having the form determined to be a attorneys or fewer. In other words, our respondents non-conforming form, that is a non-statutory power of attorney. were generally well-experienced estate planning attorneys. Some practitioners questioned whether more than the seven Below is a summary of some of the answers to this survey. lines could be used; others, however, added pages and pages of additional provisions under this heading in an attempt to include Use of Statutory Forms: all the provisions they thought necessary for a client. While there One set of questions dealt with the use of the statutory form powers has been no appellate answer provided to this question, the answer 3 of attorney found in the Act. Eight-seven of the 90 respondents most likely falls somewhere in between. It is for this reason that indicated that one or the other statutory form was used in their most practitioners use the statutory forms to achieve the benefits practices. Of the forms used, six indicated that only the Limited provided by those forms, but include a supplemental power of Power of Attorney was used. The rest used either the Personal attorney to include additional provisions thought necessary. Financial Power of Attorney (46) by itself or they used both forms (35). Moreover, of those respondents who indicated they Some of the powers that practitioners reported use a statutory form power of attorney, 38 said they always use a that they are including as Special Instructions are: supplemental, non-statutory power of attorney, and 22 said they • Statement of durability. sometimes use a supplemental, non-statutory power of attorney. • Statement allowing co-agents to act independently. • Power to amend revocable trust agreement provisions. Special Instructions: • Modifying the power to change beneficiary designations Another set of questions addressed the use of the “Special on retirement accounts to a limited class of beneficiaries, Instructions” that are found in the statutory form powers e.g. spouse and children. of attorney. Special Instructions are optional; if needed, • Indemnification provisions for third parties, e.g. financial they are included where the seven blank lines are set forth institutions. as a placeholder. Of the 90 respondents, 78 indicated • Indemnification provisions for agents. they include Special Instructions sometimes or always. • Powers that allow businesses to be operated. Only 11 said they never include Special Instructions. • Pet care provisions. • Authority to deal with the U.S. Post Office. The Special Instructions have created much of the confusion • Gifting powers. regarding the use of these forms. Because of the desire of most

3 The Personal Financial Power of Attorney is found at Section 17-202 of the Act, and the Limited Power of Attorney can be found in Section 17-203. (continued on page 19)

18 Survey. . . (continued from page 18) Enforceability of Powers of Attorney: accept an agent’s authority. Another set of questions dealt with the enforceability of • Define and/or increase penalties for failure of third powers of attorney against third parties. There were 52 of 90 parties to accept agent’s authority. affirmative responses to the question asking whether a client • Allow court to award attorney fees for enforcement has sought assistance in getting a third party to accept an actions for all powers of attorney, both statutory and non- agent’s authority under a power of attorney. Of the responses statutory. received, there were 11 clients who had Statutory Limited • Delete forms, or clearly make them “suggested forms.” Powers of Attorney denied, 34 clients who had Statutory • Define “substantially in the same form;” or, in the Personal Financial Powers of Attorney denied, and 34 clients alternative, remove this provision in the statute. who had non-statutory powers of attorney denied. Therefore, • Provide that financial institutions cannot require of the total of 79 times an attorney’s assistance was sought indemnification or add provision regarding good faith to enforce a power of attorney, there were 45 times that a reliance. Statutory Power of Attorney was the subject for the denial. CHANGES TO THE STATUTORY PERSONAL POWER Reasons given for the denial of an agent’s authority by a OF ATTORNEY: third-party included: • Power to make gifts. • Financial institutions only accepted their own power of • Power to manage tangible personal property. attorney forms. • Power to manage U.S. Mail. • The power of attorney was stale or too old. • Durability language. • The power of attorney did not include an indemnification • Agent compensation. provision. • Authorize spousal election or elective share. • The power of attorney was executed in another state. • Authorize disclaimers. • The original of the power of attorney was required; a • Allow agents to create trusts on behalf of the principal. copy would not suffice. • Include Agent’s Rights/Responsibilities4 into the form itself. In most cases, an attorney was able to intervene and have • Business transaction provisions. the power of attorney accepted. Only one respondent • Include a bold statement/warning re failure to accept resorted to litigation, and in three cases, the matter was agent’s authority. never resolved. There were also a few cases where the client closed the account and moved to another financial institution. One attorney suggested that we replace the current statute with the original one that was proposed by the Uniform Commission Requested Changes to the Statute/Forms: of Laws back in 2006. While possible, it is unlikely that anyone This open question was asked: “If there were three things that you would want to fight the battle that was lost 10 years ago when the could change in the current Act, what would they be?” There were current law was passed after four years attempting to do just that. 105 separate responses. These responses broke down into three broad categories: educational opportunities, proposed changes Conclusion: in the statute, and proposed changes to the statutory forms. While it was heartening that the Act has mostly accomplished Educational opportunities are those situations where the responses the goals that it was intended to address, the answers to the indicated a misunderstanding of the Act or a misunderstanding questions that were posed in the survey identified several things by the community regarding the provisions of the Act. that can or should be done to make the provisions of the Act even more effective. Over the next several months, the Estates EDUCATIONAL OPPORTUNITIES: & Trusts Section Council and the Vulnerable Adult Exploitation • Clarification of how the “Special Instructions” section Task Force, among others, will be review the survey results can be used. with the goal of putting together an omnibus bill to address at • Educational programs for attorneys and financial least some of the improvements to the Act that should be made. institutions regarding the Act. • Applicability of the Act to all powers of attorney. 4 These provisions are included in the Limited Power of Attorney under Section 17- 203, but not the Personal Financial Power of Attorney under Section 17-202. STATUTORY CHANGES: • Require financial institutions to accept statutory powers of attorney. • Increase authorized penalty for third parties who do not

18 19 ESTATE AND TRUST LAW SECTION COUNCIL

REPORT OF THE NOMINATING COMMITTEE The members of the Nominating Committee for the Estate and Trust Law Section Council: Anne W. Coventry, Jonathan G. Lasley, Danielle M. Cruttenden, Mary Alice Smolarek and David C. Dembert (Chair of the Committee), recommend the following appointments for 2020-2021:

Nominations for Officers 2020-2021 Chair: Anne W. Coventry Chair-Elect: Michaela C. Muffoletto Secretary: Christine W. Hubbard

Nomination, New Members, Term 2020-2022 Kelly M. Preteroti (Baltimore, 2020) Sarah J. Broder (Bowie, 2020), Young Lawyers Section Member

Nominations for Term 2020-2022 Todd J. Bornstein (Bethesda, 2018) Jeffrey S. Glaser (Baltimore, 2015) Charles B. Jones (Baltimore, 2015) Sarah B. Kahl (Baltimore, 2017) Christia A. Pritts (Baltimore, 2016) Roland M. Schrebler (Baltimore/Montgomery, 2016)

Other nominations for officers and members may be made by written nomination signed by no fewer than 15 members of the Section. Any such nomination(s) must be submitted to the current secretary, Michaela C. Muffoletto, at least ten (10) days before the Section’s annual meeting, which is in the process of being scheduled for June, to coincide with the membership meeting of the Maryland State Bar Association.

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