Advanced Estate Planning and Administration 2016

Cosponsored by the Estate Planning and Administration Section

Friday, June 10, 2016 8:30 a.m.–4:30 p.m.

6 General CLE credits and 1 Ethics credit ADVANCED ESTATE PLANNING AND ADMINISTRATION 2016

SECTION PLANNERS Philip Jones, Duffy Kekel LLP, Portland Robin Smith, Butcher & Smith Law LLC, Portland Margaret Vining, Davis Wright Tremaine LLP, Portland Katharine West, Wyse Kadish LLP, Portland Eric Wieland, Samuels Yoelin Kantor LLP, Portland

OREGON STATE BAR ESTATE PLANNING AND ADMINISTRATION SECTION EXECUTIVE COMMITTEE Erik S. Schimmelbusch, Chair Melanie E. Marmion, Chair-Elect Matthew W. Whitman, Past Chair Ian T. Richardson, Treasurer Philip N. Jones, Secretary Stuart B. Allen Jeffrey M. Cheyne Eric R. Foster Janice E. Hatton Amelia E. Heath Holly N. Mitchell Jeffrey G. Moore Hilary A. Newcomb Robin A. Smith Margaret Vining Eric J. Wieland

The materials and forms in this manual are published by the Oregon State Bar exclusively for the use of attorneys. Neither the Oregon State Bar nor the contributors make either express or implied warranties in regard to the use of the materials and/or forms. Each attorney must depend on his or her own knowledge of the law and expertise in the use or modification of these materials.

OREGON STATE BAR 16037 SW Upper Boones Ferry Road P.O. Box 231935 Tigard, OR 97281-1935

Advanced Estate Planning and Administration 2016 ii TABLE OF CONTENTS

Schedule ...... v

Faculty ...... vii

1. One Foot in Each State: Planning and Administering the Multistate Estate ...... 1–i — John Draneas, Draneas & Huglin PC, Lake Oswego, Oregon

2. Charitable Deductions ...... 2–i — Penny Serrurier, Stoel Rives LLP, Portland, Oregon

3. Anticipating and Conducting Estate and Gift Tax Audits: Confessions of a Former IRS Attorney 3–i — Justin Alt, Davis Wright Tremaine LLP, Seattle, Washington

4. Firearms in Estate Administration ...... 4–i — Brian M. Thompson, Law Office of Brian M. Thompson, Eugene, Oregon

5. Is the Trust Funded? ...... 5–i — Eric Wieland, Samuels Yoelin Kantor LLP, Portland, Oregon

6. Using Mediation and Arbitration to Manage Family Conflict and Resolve Trust and Estate Disputes ...... 6–i — Professor Susan Gary, University of Oregon School of Law, Eugene, Oregon

7. Estate Planning Ethics Questions 7–i — Philip Jones, Duffy Kekel LLP, Portland, Oregon — Robin Smith, Butcher & Smith Law LLC, Portland, Oregon — Margaret Vining, Davis Wright Tremaine LLP, Portland, Oregon — Katharine West, Wyse Kadish LLP, Portland, Oregon — Eric Wieland, Samuels Yoelin Kantor LLP, Portland, Oregon

Advanced Estate Planning and Administration 2016 iii Advanced Estate Planning and Administration 2016 iv SCHEDULE

7:30 Registration

8:30 One Foot in Each State: Planning and Administering the Multistate Estate F Multistate estate taxation—apportionment, Oregon elections, drafting considerations F Income taxation of multistate trusts—does an Oregon co-trustee create an Oregon tax? F Changing trust situs John Draneas, Draneas & Huglin PC, Lake Oswego

10:00 Break

10:15 Tax Matters in Charitable Giving F Income tax and gifts during life F Estate tax and gifts at death F Split interest gifts F Private foundations and alternatives Penny Serrurier, Stoel Rives LLP, Portland

11:00 Anticipating and Conducting Estate and Gift Tax Audits: Confessions of a Former IRS Attorney F Best practices to minimize audit risks and maximize tax efficiencies F The IRS audit process F Strategies for effectively resolving IRS audits F Appeals process for “unagreed” cases Justin Alt, Davis Wright Tremaine LLP, Seattle

Noon Lunch

1:00 Firearms and Estates F National Firearms Act of 1934 and Gun Control Act of 1968 F Oregon SB 941 (2015) F Identifying controlled firearms F What is a “transfer” of a firearm? F Gun trust guidance Brian M. Thompson, Law Office of Brian M. Thompson, Eugene

1:45 Is the Trust Funded? F Revocable living trusts F Personal residences after the first spouse’s death F “Difficult” assets, such as airplanes and timeshares F Retirement accounts with trusts as beneficiaries Eric Wieland, Samuels Yoelin Kantor LLP, Portland

2:30 Break

Advanced Estate Planning and Administration 2016 v SCHEDULE (Continued)

2:45 Using Mediation and Arbitration to Manage Family Conflict and Resolve Trust and Estate Disputes F Representing clients in mediation—helping clients understand the process and reach acceptable results F Family meetings to address business or property issues F Enforcement of mediation and arbitration clauses F Challenges in drafting mediation and arbitration clauses Professor Susan Gary, University of Oregon School of Law, Eugene 3:30 Legal Ethics for Estate Planners F Commonly encountered ethical issues F Ethically representing married couples, families, and businesses F Recognizing and avoiding conflicts of interest Philip Jones, Duffy Kekel LLP, Portland Robin Smith, Butcher & Smith Law LLC, Portland Margaret Vining, Davis Wright Tremaine LLP, Portland Katharine West, Wyse Kadish LLP, Portland Eric Wieland, Samuels Yoelin Kantor LLP, Portland 4:30 Adjourn

Advanced Estate Planning and Administration 2016 vi FACULTY

Justin Alt, Davis Wright Tremaine LLP, Seattle. Mr. Alt is of counsel in the firm’s Seattle office and a member of the firm’s Trusts and Estates practice group. His practice emphasizes minimizing federal and state transfer taxes. He is an adjunct law professor at the University of Washington School of Law, teaching estate planning courses in the school’s graduate program in taxation. Mr. Alt received his LL.M. in taxation from the University of Washington School of Law. John Draneas, Draneas & Huglin PC, Lake Oswego. Mr. Draneas focuses his practice on tax and estate planning. He is a Fellow of the American College of Trust and Estate Counsel and serves on its Business Planning and Estate and Gift Tax committees and its Valuation subcommittee. His other memberships include the Oregon Society of CPAs, the American Bar Association, and the Estate Planning Council of Portland. He is a recipient of the Oregon State Bar Taxation Section Award of Merit. Mr. Draneas is a frequent speaker at professional education seminars. Professor Susan Gary, University of Oregon School of Law, Eugene. Professor Gary is the Orlando J. and Marian H. Hollis Professor at the University of Oregon School of Law. She teaches nonprofit organizations, trusts and estates, and estate planning, and she has written and spoken about the regulation of charities, the definition of family for inheritance purposes, and the use of mediation to resolve disputes in probate and during the etate planning process. She has been involved in establishing the law school’s Probate Mediation Clinic and Nonprofit Clinic and serves as faculty supervisor of the Nonprofit Clinic. She is an Academic Fellow and Regent of the American College of Trust and Estate Counsel. Professor Gary served as Reporter for the Drafting Committees of the Uniform Law Commission that developed the Uniform Prudent Management of Institutional Funds Act and the Model Protection of Charitable Assets Act. Philip Jones, Duffy Kekel LLP, Portland. Mr. Jones practices primarily in the areas of estate planning, estate and trust administration and taxation, and estate and trust litigation. He is a member of the American College of Trust and Estate Counsel and the Estate Planning Council of Portland. He served for 20 years as an Adjunct Professor of Law at Lewis and Clark Law School, where he taught Estate & Gift Taxation and Federal Tax Procedure. He is the author of numerous articles in the Journal of Taxation and other publications. Mr. Jones is admitted to practice in Oregon and Washington. Penny Serrurier, Stoel Rives LLP, Portland. Ms. Serrurier represents public charities, affiliated foundations, grant-making foundations, quasi-governmental entities, private operating foundations, trade associations, advocacy organizations, and social clubs advising on all aspects of governance, compliance, and tax-related matters. She also works with individuals and families on business succession planning matters. She is a Fellow of the American College of Trusts and Estates Counsel and a member of the Estate Planning Council of Portland, the Northwest Planned Giving Roundtable, the Oregon State Bar Business Law, Estate Planning and Administration, and Taxation sections, the American Bar Association Taxation Section, the Multnomah Bar Association, and Oregon Women Lawyers. Ms. Serrurier also serves as an adjunct professor of law at Lewis and Clark Law School, teaching nonprofit organizations. Robin Smith, Butcher & Smith Law LLC, Portland. Ms. Smith focuses her practice in the areas of estate planning, trust administration, nonprofit organizations, tax, and real estate. She is a member of the Estate Planning Council of Portland, the Oregon State Bar Estate Planning and Administration, Elder Law, and Nonprofit Organizations Law sections, the Multnomah Bar Association, and the Washington State Bar Real Property and Probate Section. Ms. Smith is a regular presenter for the Oregon State Bar and other professional groups. She has taught Charitable Giving and Tax Exempt Organizations in the University of Washington Graduate Program in Taxation. Ms. Smith is admitted to practice in Washington (inactive) and Oregon.

Advanced Estate Planning and Administration 2016 vii FACULTY (Continued)

Brian M. Thompson, Law Office of Brian M. Thompson, Eugene. Mr. Thompson practices in the areas of estate planning, elder law, and business law. Among other professional activities, he is past president of the Lane County Bar Association and has served on the Oregon State Bar Elder Law Section Executive Committee. Mr. Thompson is a frequent speaker and author on estate planning, elder law, and taxation topics. Margaret Vining, Davis Wright Tremaine LLP, Portland. Ms. Vining counsels high–net worth individuals, business owners, and families in trust and estate matters. She advises on wealth transfer and estate, gift, and business succession planning, represents clients in the administration of trusts and estates, and works with tax-exempt organizations and charitable foundations. Ms. Vining serves on the Oregon State Bar Estate Planning and Administration Executive Committee and the Sustainable Future Section Programs and CLE Committee. Katharine West, Wyse Kadish LLP, Portland. Ms. West focuses her practice on estate planning, estate and trust administration, protective proceedings (guardianships and conservatorships), and related probate court matters. She is a member of the Oregon State Bar Estate Planning and Administration Section CLE Planning Committee, the State Bar of California Trusts and Estates Section, and the Multnomah Bar Association. Ms. West is admitted to practice in Oregon and California. Eric Wieland, Samuels Yoelin Kantor LLP, Portland. Mr. Wieland works in the areas of estate planning, business planning, taxation, and trust and estate administration. He is a member of the American Bar Association and a member and past chair of the Oregon State Bar Estate Planning and Administration Section Executive Committee. He holds an LL.M. in Taxation from the University of Washington School of Law. Mr. Wieland is licensed to practice law in Oregon and Missouri.

Advanced Estate Planning and Administration 2016 viii Chapter 1 One Foot in Each State: Planning and Administering the Multistate Estate

John Draneas Draneas & Huglin PC Lake Oswego, Oregon

Contents I. Multistate Estate Taxation 1–1 A. Overview ...... 1–1 B. Estate Tax Apportionment ...... 1–1 C. State Specific Elections ...... 1–3 D. Drafting Considerations 1–5 II. State Taxation of Trusts ...... 1–9 III. Does an Oregon Co-Trustee Cause Oregon Taxation? ...... 1–10 A. Hypothetical Scenario 1–10 B. The Relevant Statutes ...... 1–10 C. The Relevant Administrative Rule 1–11 D. The Relevant Cases ...... 1–11 E. The Rule Is Wrong ...... 1–11 F. Who Is Considered to Be a Fiduciary? 1–12 G. What Is Trust Administration? ...... 1–18 H. Trust Advisors and Protectors ...... 1–20 I. Addressing the Hypothetical Scenario ...... 1–22 IV. Changing Trust Situs ...... 1–22 A. Why Change the Situs of a Trust? ...... 1–22 B. General Rules 1–23 C. Oregon Statutory Provisions of Relevance ...... 1–23 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

Advanced Estate Planning and Administration 2016 1–ii Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

I. Multistate Estate Taxation

A. Overview. The number of states that impose death taxes has been declining in recent years, attesting to the unpopularity of such taxes. Today, 19 states and the District of Columbia have an estate or inheritance tax. Of these, Maryland and New Jersey have both. The only Western states with a death tax are Oregon, Washington and Hawaii. Washington has the nation's highest tax rate at 20%, with a $2,079,000 exemption. Oregon's 16% top rate ties it for second in the nation, and its $1 million exemption is the nation's second lowest. Portability is largely a federal-only concept – Hawaii and Delaware are the only states that currently provide for it.

States' jurisdiction to tax a decedent's estate is largely territorial, based upon property situs. An estate holding property in multiple taxing states will be exposed to taxation in each state, with each state determining the extent of tax due under its own rules. There is no statutory or constitutional prohibition on double taxation.

Planning an estate that includes assets located in multiple taxing states requires careful drafting and planning in order to minimize the overall tax imposition.

B. Estate Tax Apportionment. The most common approach among the taxing states is to apportion the estate tax burden in some manner among the states where property is located.

1. Example 1. Suppose that an unmarried Oregon decedent owns three assets: (i) an Oregon residence with a value of $2 million; (ii) a Washington investment real property with a value of $5 million; and (iii) a marketable securities portfolio with a value of $3 million.

a. Washington and Oregon would both calculate a tentative estate tax under their rules on the entire $10 million estate. The tentative estate tax in Oregon would be $1,102,500, and $1,279,595 in Washington.

b. Both states would apportion the tentative tax based upon the proportion of the gross estate having a situs in the state. Marketable securities are intangibles, and are treated as having a situs in the decedent's state of residency (Oregon), without regard to the state of organization or residency of the issuers of the underlying securities or the brokerage holding the account.

c. Thus, $5 million of assets are allocable to each state, so each state's apportionment factor is 50%. The Oregon tax is $551,250, and the Washington tax is $639,798.

Advanced Estate Planning and Administration 2016 1–1 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

d. There is no requirement that both states be taxing states for apportionment to apply. If the Washington real property in the example were located in California, which does not impose a tax, the Oregon tax would still be $551,250. That is because the estate tax is apportioned the same as the assets are apportioned. It is not a credit offset. The reason for that is that Oregon has no constitutional basis to tax the California property.

2. Example 2. H and W are retired Texas residents with a $20 million estate, all community property. Their estate plan creates a $5.4 million credit shelter trust at the first death, with the rest passing to the surviving spouse. Their only son and his wife have moved to Portland and recently had their first child. Mom and Dad want to spend time with their family, so they buy a Portland residence for $2 million, paying all cash and taking title as tenants in common. Dad dies.

a. Dad's estate is subject to Oregon estate tax because he owned real property in Oregon. His gross estate is $10 million. After a $4.6 million marital deduction, the taxable estate is $5,400,000. His tentative Oregon tax is $471,000. The apportionment factor is 10% ($1,000,000/$10,000,000), and his Oregon tax is $47,100. (See the discussion at I. C. 2. regarding whether an Oregon-only marital deduction might alleviate the tax burden.)

b. The Oregon tax appears even more unfair if we change the form of ownership to tenants by the entirety. Now, the Portland residence passes entirely to Mom at Dad's death. However, the Oregon tax remains exactly the same. The survivorship interest merely reduces the marital gift, and the taxable estate remains the same. As a rule, liabilities and deductions are not allocated to specific states under the apportionment approach.

c. The solution would be to form a new LLC, owned equally by Mom and Dad, to hold the Portland residence. (The LLC can be organized in any state, including Oregon. However, organizing it elsewhere would make the strategy more opaque.) Dad's 50% interest in the LLC is intangible personal property, and its situs is deemed to be the state of his residence – Texas. He now has no property with an Oregon situs, so no Oregon tax and no need to file an Oregon return.

d. Note that the Washington Department of Revenue has taken the position that an LLC holding Washington real property will be treated as Washington-situs property unless the LLC is "operating for a true business purpose." Of course, the terms "true" and "business purpose" are not defined. Washington practitioners routinely ignore this position as not being based upon any authority at all. If you want to be careful about this, it would seem best to add other investment assets. You could also use an S Corporation, although that could create other tax problems.

Advanced Estate Planning and Administration 2016 1–2 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

Note that one can get whipsawed here. Oregon would treat the LLC as Oregon-situs property and tax the estate accordingly. If Washington imposes an estate tax in this situation, it will be a double-tax situation.

e. Note also that New York has taken the position that the assets of a single-member LLC that is disregarded for federal income tax purposes will be treated as owned by the decedent for estate tax purposes.

3. Planning Considerations. LLCs are useful to convert real property into intangible personal property and change its situs to that of the state of residence.

a. However, sometimes it is better not to. Consider the variation of Example 1where the real property was located in California. If the decedent had formed an LLC to hold that property for liability protection purposes, regardless of the state of organization, it would be an intangible with an Oregon situs for Oregon estate tax purposes. Holding the real property personally allows the estate to apportion part of its state estate tax burden to a non-taxing state. Of course, direct ownership raises asset protection planning issues, and subjects the property to probate in the state where it is located. That can be solved with a TOD deed or a living trust.

b. Ignoring the Washington and New York positions is not free from risk. If the LLC is the only asset with property located in that state, no estate tax return would be filed, and the statute of limitations would never start to run.

C. State Specific Elections. Oregon allows an estate to make various elections that are specific to the Oregon estate tax. Many other states have similar provisions.

1. Oregon Marital Deduction. If the estate is automatically entitled to a marital deduction (an outright gift to the surviving spouse, or a gift to a trust that qualifies for the marital deduction without the need to make a QTIP election), the Oregon deduction is likewise automatic. If the estate makes a federal QTIP election, presumably including one made solely for portability purposes, that also carries over to the Oregon estate tax return; however, the personal representative may choose to make a different (i.e., no marital deduction) election for Oregon purposes. ORS 118.010(8)(a). That provision also allows the executor to make a QTIP election on the Oregon return even if no federal return is filed.

However, the foregoing provisions apply only to transfers that would or could qualify for a federal marital deduction. Where the estate plan involves maximum use of a credit shelter trust, for example, the credit shelter trust may not qualify for a QTIP election because it does not distribute all of its income to the

Advanced Estate Planning and Administration 2016 1–3 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

spouse or it provides for distributions to beneficiaries other than the spouse. To alleviate the conflict between the federal estate plan based on the higher exemption amount and the Oregon estate tax situation, ORS 118.013 and 118.016 provide for an Oregon Special Marital Property election. The executor can claim an Oregon-only marital deduction even if the trust: (i) can accumulate income; or (ii) can distribute to other persons during the lifetime of the surviving spouse. However, if the defect is the potential to distribute to others, each of the other permissible distributes must release their rights to receive any distributions from the trust during the spouse's lifetime.

2. Nonresident spouse. Note that the Oregon-only deduction does not depend upon the residency of the spouse. If a nonresident decedent's Oregon-situs property passes to the nonresident spouse, an Oregon-only marital deduction can be claimed.

This can provide a solution in the scenario described at I. B. 2. where married nonresidents own Oregon property. However, the gift for the benefit of the spouse may not qualify for a marital deduction, such as where it passes to a trust. An OSMP election may be awkward for the family, such as where nonresident children are expected to permanently release their rights to distributions from the entire trust in order to secure a possibly modest Oregon estate tax savings.

3. Other Oregon Elections. ORS 118.013 also provides for separate elections to be made for Oregon with respect to qualified conservation easements, alternate valuation, special use valuation and qualified domestic trusts.

4. No recapture of marital deduction. There is no recapture provision that would apply where the surviving spouse moves out of Oregon after an Oregon-only marital deduction is claimed. ORS 118.010(3)(a) would, of course, increase the spouse's estate by the marital deduction property. However, ORS 118.101(2)(b) imposes an estate tax on nonresidents only if they own property that is located in Oregon at their death. Since the spouse's interest in the trust terminates at death, there is no owned property.

This result may seem surprising, but it shouldn't be. The policy goals of the Oregon marital deduction are to essentially treat the spouse as having inherited the assets for purposes of the estate tax. If the assets had been distributed outright to the spouse, and the spouse had later moved to another state and taken all the assets along, there would be no Oregon estate tax payable at the spouse's death.

OAR 150-010(8) takes a somewhat different position: The gross estate of a nonresident surviving spouse must include the value of any property included in the QTIP or OSMP election to the extent that the property consists of real

Advanced Estate Planning and Administration 2016 1–4 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

property located in Oregon or tangible personal property located in Oregon. However, that conclusion is questionable.

ORS 118.010 imposes estate taxation on a "nonresident decedent whose estate includes any interest in: (A) Real property located in Oregon; or (B) Tangible personal property located in Oregon." The fact that a deduction was previously allowed with respect to certain property does not give the decedent an "interest" in that property.

"Estate" is not defined. However, ORS 118.005(6) provides, “'Gross estate' has the meaning given that term in section 2031 of the Internal Revenue Code." The Oregon marital deduction property is not included in the spouse's federal estate.

ORS 118.010(3) does provide that the marital deduction property is to be added to the federal estate for Oregon estate tax purposes, but that still doesn't create an interest in the property on the part of the spouse. Thus, lacking a jurisdictional basis for the imposition of the tax, there is nothing to add the property to.

Finally, any concern about Oregon's ability to tax the nonresident spouse should be eliminated by transferring the Oregon property to an LLC, thereby converting it to intangible personal property with a non-Oregon situs.

5. Recapture of other elections. There do not seem to be any applicable recapture provisions for other separate elections, although ORS 118.140 creates a recapture rule for natural resource property.

D. Drafting Considerations. It is important to draft the estate planning documents so the personal representative has maximum flexibility to make state specific elections, as it is hard to predict what property the client will own on the date of death, or where its situs will be.

1. Division of trusts. Since states have different exemption amounts, the bypass (credit shelter) trust should be divisible into separate trusts so that differing state specific elections can be made.

a. Formula provision. Here is a sample formula provision that will divide the bypass trust into as many separate trusts as there are different state exemption amounts:

The Bypass Share shall be divided, held, administered and distributed as follows:

6.1 Division for State Inheritance Tax Purposes. If, but for the provision of this Article, my estate would incur an

Advanced Estate Planning and Administration 2016 1–5 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

estate or inheritance tax in any state (“State Inheritance Tax”), the Bypass Share shall be divided into two separate shares as follows. One share, referred to as the “State Exempt Share,” shall be equal to the largest fractional share of the Bypass Share that can pass free of State Inheritance Tax. The other share, referred to as the “State Taxable Share,” shall include the remainder of the Bypass Share; however, I recognize that, due to possible similarities between Federal and State laws, the State Exempt Share may be 100% of the Bypass Share. The State Exempt Share shall be held, administered and distributed in a separate trust referred to as the “[*Client Last*] Bypass Trust” in accordance with Section 6.5. The State Taxable Share shall be further divided in accordance with Section 6.2.

6.2 Further Division of State Taxable Share. I recognize that my estate may be subject to State Inheritance Tax in more than one state, and such states (“Taxable States”) may have different State Inheritance Tax laws, rules and regulations such that the determination of the State Exempt Share would be different if determined under the laws, rules and regulations of the various Taxable States. I also recognize that in such circumstances, the application of Section 6.1 will result in the State Exempt Share being limited to the largest fractional share of the Bypass Share that can escape State Inheritance Tax in all Taxable States. In such event, in order to facilitate tax planning in the various Taxable States, the State Taxable Share shall be further divided into separate shares as follows:

a. Share A shall be equal to such fractional share of the State Taxable Share as would, if added to the State Exempt Share, pass free of State Inheritance Tax in the second highest number of Taxable States.

b. The remainder of the State Taxable Share shall be allocated to successive shares, identified as Shares B, C, etc., as can pass free of State Inheritance Tax in the third, fourth, etc. highest number of Taxable States, with the remainder of the State Taxable Share allocated to the final such share.

If my estate is not subject to State Inheritance Tax in more than one Taxable State, or if all Taxable States use the same rules, then the entire State Taxable Share shall be allocated to Share A. Any of the foregoing shares as to which no election described in Section 6.4 is made shall be held in a separate trust in accordance with Section 6.5. The remainder of the shares shall each be held in a separate trust in accordance with Section 6.6. Each of such

Advanced Estate Planning and Administration 2016 1–6 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

separate trusts shall be referred to as the “[*Client Last*] [letter] Trust,” and the entire group is referred to herein as the “[*Client Last*] Letter Trusts.”

6.3 Method of Division. The divisions of the various shares pursuant to Sections 6.1 and 6.2 shall be made by applying the provisions of Section 5.1 by reference to the equivalent provisions of the relevant State Inheritance Tax laws, rules and regulations.

6.4 Tax Elections. My Personal Representative shall be free to make elections pursuant to Section 2056 (b) of the Code, or its equivalent under the laws, rules and regulations of each of the Taxable States, as my Personal Representative deems advisable for the purpose of minimizing the aggregate State Inheritance Tax payable by my estate.

6.5 Disposition of Exempt Trusts. The [*Client Last*] Bypass Trust, and any of the [*Client Last*] Letter Trusts as Section 6.2 directs are to be held under this section, shall be held, administered and distributed on the following terms and conditions:

a. Distributions During Lifetime of Spouse. During the lifetime of my spouse, my Trustee shall distribute to or apply for the benefit of my spouse such amounts of income or principal as my Trustee deems necessary or advisable for my spouse's health, education, support and maintenance in accordance with the standard of living to which my spouse was accustomed at the time of my death. In making such distributions, my Trustee shall first take into account all other income, support and property reasonably available to my spouse for such purposes, including distributions under other trusts created hereunder.

b. Distributions Upon Death of Spouse. Upon the death of my spouse, the entire then remaining trust estate shall be divided into as many equal shares as there are children of mine then living and children of mine who are not then living but have left lineal descendants who are then living. Such shares shall be distributed as follows:

i. Each share established for the benefit of a surviving child of mine shall be distributed outright to such child.

Advanced Estate Planning and Administration 2016 1–7 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

ii. Each share established for the benefit of the lineal descendants of a deceased child of mine shall be distributed to such lineal descendants by right of representation; provided, if any property becomes distributable to any person who is then under the age of 30, such property shall instead be held by my Trustee in a separate trust for the benefit of such person, on the terms and conditions of a Descendant’s Trust as set forth in Article 7.

6.6 Disposition of Other Trusts. Each of the [*Client Last*] Letter Trusts that Section 6.2 directs are to be held under this section shall be held, administered and distributed on the following terms and conditions:

a. Distributions During Lifetime of Spouse. During the lifetime of my spouse, my Trustee shall distribute to or apply for the benefit of my spouse:

i. All of the net income of the trust, no less frequently than annually.

ii. From time to time, such amounts of principal as my Trustee deems necessary or advisable for my spouse's health, education, support and maintenance in accordance with the standard of living to which my spouse was accustomed at the time of my death. In making such distributions, my Trustee shall first take into account all other income, support and property reasonably available to my spouse for such purposes, including distributions under other trusts created hereunder.

i. Each share established for the benefit of a surviving child of mine shall be distributed outright to such child.

Advanced Estate Planning and Administration 2016 1–8 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

instead be held by my Trustee in a separate trust for the benefit of such person, on the terms and conditions of a Descendant’s Trust as set forth in Article 7.

b. PR discretion approach. Alternatively, and especially if brevity is important to you, you can take a Clayton-style approach and just give the personal representative the power to divide the bypass trust into two or more trusts so that separate state specific elections can be made. However, it is not clear if a given state will accept the division, or when the division must actually be made. The formula approach resolves those concerns.

2. Terminating trusts. Whatever actions are taken at the death of the first spouse, it is always possible that subsequent events can make them regrettable. For example, a law change or a residency change by the surviving spouse can make a trust unnecessary. In such cases, continuation of the trust can create unnecessary complexity and administrative cost, and possible undesirable income tax consequences. Thus, it is wise to consider creation of a mechanism to terminate a trust when and if it outlives its usefulness.

a. Use of independent trustee. Many clients will want the spouse to be the trustee. That forces the distribution provisions to be limited by an ascertainable standard (HEMS), which will likely force the trust to continue indefinitely. Flexibility can be added by giving someone, such as a protector, the power to appoint an independent trustee who can exercise very broad discretion to make distributions to the spouse. For example, the distribution provisions can include something along the lines of, "The Independent Trustee, if appointed, may distribute to the Trustor's Spouse such additional amounts of income and principal of the Bypass Trust as the Independent Trustee may from time to time deem appropriate and in the best interests of the Trustor's Spouse." The independent trustee can exercise this discretion to distribute all of the trust assets to the spouse, thereby terminating the trust in the spouse's favor. If partial distributions are more appropriate, the protector can appoint the independent trustee for this purpose and, after the distributions have been made, remove the independent trustee. The independent trustee can be reappointed whenever the need arises again.

b. Power of appointment. The same result can be achieved by giving a third party a power of appointment that can be exercised solely in favor of the spouse. However, if the third party is a remainder beneficiary, the exercise of the power may be a taxable gift to the spouse.

II. State Taxation of Trusts. This outline will not attempt to describe all of the approaches that various states take to the income taxation of trusts. Rather, some of the more common approaches will be summarized to paint the landscape from a planning perspective.

A. No tax. Several states impose no income tax on trusts at all.

Advanced Estate Planning and Administration 2016 1–9 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

B. State of creation. Some states tax a trust if it was created in the state or under the will of a resident decedent. This approach has been called into question with the decision in Linn v. Department of Revenue, 2 N.E. 3d 1203 (Ill. App. Ct. 2013). In Linn, the Illinois Intermediate Court held that the Illinois statute that taxed a trust created by an Illinois resident even though the trustee administered the trust in another state and none of the beneficiaries lived in Illinois was an unconstitutional violation of the Due Process Clause. The Court found insufficient contacts between the trust and the state to justify taxation.

C. Place of administration.

D. Residence of trustee.

E. Residence of beneficiaries.

III. Does an Oregon Co-Trustee Cause Oregon Taxation?

A. Hypothetical scenario. Suppose that a decedent is a resident of a state other than Oregon – we'll call it Home State – and owns no Oregon-situs property at death. The decedent creates a testamentary trust for the benefit of the grandchildren and names the two children as co-trustees. All of the children and grandchildren are residents of Home State. After several years, one of the children, an avid viewer of "Portlandia" and "Grimm," becomes infatuated with Portland and moves to a Pearl District condo. The Home State co-trustee manages all of the trust's investments, files its income tax returns, and does most everything else with respect to the trust on a day-to-day basis. Is the trust subject to income taxation in Oregon?

B. The Relevant Statutes:

1. ORS 316.282 Definitions related to trusts and estates; rules. (1) As used in this chapter:

(d) “Resident trust” means a trust, other than a qualified funeral trust, of which the fiduciary is a resident of Oregon or the administration of which is carried on in Oregon. In the case of a fiduciary that is a corporate fiduciary engaged in interstate trust administration, the residence and place of administration of a trust both refer to the place where the majority of fiduciary decisions are made in administering the trust.

2. ORS 316.012 Terms have same meaning as in federal laws; federal law references. Any term used in this chapter has the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required or the term is specifically defined in this chapter. Except where the Legislative Assembly has provided otherwise, any reference in this chapter to the laws of the

Advanced Estate Planning and Administration 2016 1–10 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

United States or to the Internal Revenue Code refers to the laws of the United States or to the Internal Revenue Code as they are amended and in effect:

(1) On December 31, 2014; or

(2) If related to the definition of taxable income, as applicable to the tax year of the taxpayer.

3. ORS 316.292 Credit for taxes paid another state. (1) For purposes of this section, an estate or trust is considered a resident of the state which taxes the income of the estate or trust irrespective of whether the income is derived from sources within that state.

(2) Notwithstanding the limitations contained in ORS 316.082 and 316.131, if an estate or trust is a resident of this state and also a resident of another state, the estate or trust shall be allowed a credit against the taxes imposed under this chapter for income taxes imposed by and paid to the other state, subject to the following conditions:

(a) Credit shall be allowed only for the proportion of the taxes paid to the other state as the income taxable under this chapter and also subject to tax in the other state bears to the entire income upon which the taxes paid to the other state are imposed.

(b) The credit shall not exceed the proportion of the tax payable under this chapter as the income subject to tax in the other state and also taxable under this chapter bears to the entire income taxable under this chapter.

C. The Relevant Administrative Rule:

OAR 150-316.282 Resident and Nonresident Estates and Trusts.

(3) A trust is a resident if the fiduciary is a resident of Oregon or if it is administered in Oregon.

(4) A trust is a nonresident only if there is no Oregon resident trustee and the administration is not carried on in Oregon. See ORS 316.307 and the rules thereunder regarding treatment of nonresident trusts.

D. The Relevant Cases: None.

E. The Rule is Wrong. The Rule misinterprets the statute, changes its meaning, and serves as an unwarranted extension. In the author's opinion, it can and should be challenged.

Advanced Estate Planning and Administration 2016 1–11 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

1. The Rule necessarily interprets the word "the" as being synonymous with the word "any." That is inconsistent with the wording of the statute, as well as the plain meaning of these rather simple words.

2. The Rule confuses the terms "fiduciary" and "trustee." ORS 316.012 requires that these terms be given their meaning under federal law. As will be explained below, federal law gives these terms different meanings, with "fiduciary" being the broader term. Essentially, a trustee is a fiduciary, but a fiduciary is not necessarily a trustee.

3. The statute refers to "the fiduciary," which would logically connote a single trustee. The obvious narrowness of this term suggests that there are two possible explanations:

a. The Legislature did not recognize that a trust could have more than one trustee. This would seem to be absurd.

b. The Legislature intended that, if a trust had more than one trustee, its Oregon residency status would be determined exclusively by its place of administration. This is not the interpretation that the Department of Revenue makes, but it is a perfectly solid construction of the statute, and makes more sense than a construction that requires a word to mean something it does not mean. It is also consistent with the second sentence of the statute, added later to address corporate trustees with offices in multiple states, which gives paramount significance to the place of administration.

4. The rule essentially reads the last phrase ("or the administration of which is carried on in Oregon") out of the statute. A trust is administered by its trustees – that is not a function that they can delegate to a non- trustee. If none of the trustees are resident in Oregon, then there is no way that the trust can possibly be administered in Oregon. Under the Rule, the place of administration becomes irrelevant, and the only thing that matters is the residence of the trustees. That makes surplusage of "or the administration of which is carried on in Oregon," in violation of established rules of statutory construction.

F. Who is considered to be a fiduciary?

1. The Legislative History is not helpful.

ORS 316.282(1) was originally adopted in 1969. It was renumbered as (1)(a) in 1997, when the legislature added a second clause, "In the case of a fiduciary that is a corporate fiduciary engaged in interstate trust administration, the residence and place of administration of a trust both refer to the place where a majority of fiduciary decisions are made in administering the trust." The section was subsequently renumbered as (1)(d) in 2003, when additional language was

Advanced Estate Planning and Administration 2016 1–12 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

added to the statute regarding funeral trusts and the phrase, "other than a qualified funeral trust," was added to the first clause.

In 1997, U.S. Bancorp lobbied to have the above clause regarding corporate fiduciaries added to Senate Bill 165. Soon after the bill was passed, the current OAR 150-316.282 (3) and (4) were adopted.

Prior to 1997, OAR 150-316.282(3) provided: "A trust is a resident if the fiduciary is a resident of Oregon or if it is administered in Oregon. A trust is a nonresident only if there is no Oregon resident trustee and the administration is not carried on in Oregon."

Attached to the February 6, 1997 Senate Revenue Committee Minutes was testimony submitted by Ruby Haughton of U.S. Bancorp. As part of that testimony, Haughton stated, "I am submitting a draft rule that we reached an agreement on with the Department of Revenue . . . The Department of Revenue is comfortable with this rule and will use it during the rule-making process.

The proposed rule would have removed the term "fiduciary" from (3) and substituted the word "trustee." This would have made the definition for resident trust consistent with the definition for non-resident trust. However, this revision was not adopted and the State Archives had no records related to the rule making that would explain the decision.

Instead, the result was the current OAR 150-316.282 (3) and (4), which seem to contradict each other. Subsection (3) looks at the residency of "the fiduciary," while subsection (4) looks at the residency of "the trustee."

Unfortunately, neither ORS 316.282 nor OAR 150-316.282 defines the term "fiduciary." There is no available legislative history explaining the adoption of the term "fiduciary" in the statute and neither is there information available regarding the failure to make the proposed change to the rule which would substitute the term "trustee" for "fiduciary." Further, there are no Oregon cases which define the term "fiduciary."

2. Federal law definitions.

However, there is a strong argument that the definition of "fiduciary" found in federal law would apply. ORS 316.282 was enacted when Oregon made the decision to make Oregon personal income tax law, so far as possible, identical in effect to the provision of the federal IRC. Oregon Laws, c. 493 §2 (HB 1026).

In keeping with this intent, ORS 316.012 provides, "Any term used in this chapter has the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required or the term is specifically defined in this chapter."

Advanced Estate Planning and Administration 2016 1–13 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

Federal law defines the term "fiduciary" rather broadly in IRC §7701(a)(6) as "a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person." Treas. Reg. §301.7701- 6(b) augments this definition,

(b) Fiduciary—

(1) In general. Fiduciary is a term that applies to persons who occupy positions of peculiar confidence toward others, such as trustees, executors, and administrators. A fiduciary is a person who holds in trust an estate to which another has a beneficial interest, or receives and controls income of another, as in the case of receivers. A committee or guardian of the property of an incompetent person is a fiduciary.

(2) Fiduciary distinguished from agent. There may be a fiduciary relationship between an agent and a principal, but the word agent does not denote a fiduciary. An agent having entire charge of property, with authority to effect and execute leases with tenants entirely on his own responsibility and without consulting his principal, merely turning over the net profits from the property periodically to his principal by virtue of authority conferred upon him by a power of attorney, is not a fiduciary within the meaning of the Internal Revenue Code. In cases when no legal trust has been created in the estate controlled by the agent and attorney, the liability to make a return rests with the principal. (emphasis added).

The IRS has based decisions about whether a person was a fiduciary on the specific powers of the person to direct the trustee or to receive or control the income of another. With regard to trusts, the question becomes: Are the actions taken by the fiduciary equivalent to those actions a trustee would take? If so, the fiduciary would properly be classed as a trustee. There are few rulings, memoranda or cases from which to determine whether a trust advisor would be considered a fiduciary for tax purposes.

TAM 200733023 (8/17/2007) states that the IRS has issued limited guidance expounding upon the definition of fiduciary under IRC § 7701(a)(6). It begins by citing two cases, one of which preceded the statute. U.S. v. Anderson, 135 F2d 98 (6th Cir. 1942), involved the issue of whether an agreement between the taxpayer and a bank created a trust or an agency relationship. In that case, the bank could not invest or dispose of any corpus without the consent of the settlor and was relieved of all liability for any decline in the value of the corpus. The settlor had the power to vote any corporate stock held by the bank and could remove the bank and select a successor at any time. The court stated that while an agent undertakes to act on behalf of his principal and is subject to his control, a

Advanced Estate Planning and Administration 2016 1–14 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

trustee usually has discretionary powers and acts for a term. Accordingly, because the bank did not have discretionary powers, the court held that the agreement created an agency relationship rather than a trust. See also City Nat'l Bank & Trust Co. v. U.S., 109 F.2d 191 (7th Cir. 1940) (holding that no trust was formed where bank's investment decisions could be overridden by settlor and other evidence of managerial power was lacking).

From these two cases, the TAM draws the general rule that "a fiduciary must be vested with some degree of discretionary power to act on behalf of the trust." The question presented in the TAM was whether the activities of the Special Trustees constituted active or passive business activity for purposes of IRC § 469. If the Special Trustees were not fiduciaries, then the requirements for "active" were not met. In holding that the Special Trustees were not fiduciaries, the TAM examined their role:

Although Trust represents that Special Trustees were heavily involved in the operational and management decisions of Business, Special Trustees — like the banks in Revenue Ruling 82-177 and Anderson — were ultimately powerless to commit Trust to any course of action or control Trust property without the express consent of Trustees. The contract between Trust and Special Trustees is explicit on this point, and Trust itself has acknowledged that Trustees retained final decision-making authority with regard to all facets of Business. The services performed by Special Trustees appear to be indistinguishable from those that would be expected of other non-fiduciary business personnel. If advisors, consultants, or general employees can be classified as fiduciaries simply by attaching different labels to them, the material participation requirement of § 469 as applied to trusts would be meaningless. (emphasis added).

The TAM distinguishes the facts from a state law case, In re Will of Rubin, 540 NYS2d 944 (NY Sur. Ct. 1989). The Rubin Court found that, although state law may permit trustee powers to be split among more than one trustee, there must be actual delegation of discretionary power. Rubin was a decision of a New York appellate court that addressed the status of trust advisors. In Rubin, the Appellate Division held that the designation of an advisor is a valid limitation on a trustee's powers. The Rubin court notes that other courts have generally considered an advisor to be a fiduciary, "somewhat in the nature of a co-trustee, 'quasi-trustee', or special trustee." In Rubin the court ruled that "since the relationship between the fiduciary and the advisor is that of a co-trustee, with the advisor having the controlling power, the fiduciary is justified in complying with the directives and will not generally be held liable for any losses." On the other hand, the court states: ". . . an advisor that does not have any powers under the terms of the trust agreement to direct or control a trustee in the performance of some part or all of the trustee's functions and duties, and has not been invested

Advanced Estate Planning and Administration 2016 1–15 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

with a form of veto power over particular actions of a trustee through the medium or device of requiring that those actions be taken only with the consent and approval of the advisor, will not be considered a co-trustee."

The TAM states that the courts have repeatedly refused to recognize the status of appointed "trustees" who lack any indicia of discretionary power. See City Nat'l Bank & Trust Co. v. U.S., 109 F2d 191 (7th Cir. 1940); Dunham v. Commissioner, 35 T.C. 705 (1961).

Although the TAM does not reference it, the New York Commissioner of Tax and Finance had also issued an Advisory Opinion, Petition No. I031015B, which relied on Rubins and that discussed the resident status of a trust created by John D. Rockefeller, Jr. The Rockefeller trust had a 5-member trust advisory committee. The opinion quotes the same sections of Rubins provided above and found the committee members to be co-trustees of the trust based upon the broad powers granted to the committee over the assets of the trust and the committee's ability to direct the trustee to take, or refrain from taking, certain actions. Id. at 9. Therefore, if a committee member was domiciled in New York, and the committee's powers were such that it was considered to be a co-trustee, then the trust would be a resident trust. Id. at 10. The opinion declined to determine the status that an investment advisor or provider of management services which might be retained by the committee would have because it did not have facts before it. However, it did recognize that such a person was susceptible to being considered a co-trustee and that person's domicile would then be relevant. Id.

In GCM 39368 (6/3/1985), the issue is whether a fund that was set aside for the benefit of creditors during a bankruptcy reorganization of the debtors is taxable as a trust under IRC § 641. Assets of the fund were held by a disbursing agent. The GCM focuses on the role of the disbursing agent by reference to IRC § 7701(a)(6) to decide whether the agent had broad discretionary powers with respect to the fund that require characterizing him as a trustee for tax purposes.

The GCM discusses four revenue rulings in making its decision, Rev. Rul 69-300, Rev. Rul. 82-177, Rev. Rul. 71-119, and 70-567, in finding that the powers of the disbursing agent were sufficiently broad to warrant characterizing him as a trustee. Under the facts in the GCM, the disbursing agent was required to invest the assets of the fund in a money market account backed by government securities, at a specified bank, thereby eliminating his investment discretion. However, the disbursing agent had significant additional powers under the Bankruptcy Code including to increase the fund by "avoiding transfers of the debtors' property under sections 547 and 548 of the Bankruptcy Code," which was found to amount to a power to bring suit against a third party to whom a debtor may have previously transferred its property, for the purpose of recovering such transferred property.

Advanced Estate Planning and Administration 2016 1–16 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

In Rev. Rul. 69-300, the person was held to be a fiduciary. In that case, a bank was appointed by court order to act as custodian of property pending final determination of the rightful owner. The Ruling first states that the mere appointment of a bank or individual as a custodian does not in itself cause the bank or individual to be any kind of fiduciary. However, that Ruling goes on to qualify that "where the bank or individual is vested with broad discretionary powers of administration and management, a fiduciary relationship exists within the meaning of § 7701(a)(6) of the Code." In Rev. Rul. 69-300 the bank was characterized as a trustee of the land trust share certificates on the basis of its powers of management and administration over the certificates. It is a recognized duty of a trustee to invest trust property so as to make it productive. See Restatement (Second) of Trusts § 181 (1957). The bank's investment powers in Rev. Rul. 69-300 were actually quite limited. It had no authority at all to dispose of the land trust certificates that were the corpus of the trust, and its discretion in investing the earnings of the certificates was limited to investing them only in government obligations. Despite these limitations, the bank was held to be a fiduciary.

In three of the rulings, the person was held not to be a fiduciary. Rev. Rul. 70-567 holds that a bank is not required to file Form 1041 to report interest on funds it holds in escrow while the court determines the proper distribution when the bank is merely an escrowee and does not perform the ordinary duties of a trustee.

In Rev. Rul. 71-119, under an agreement of compromise and settlement, a corporation deposited an amount of money with a United States District Court. In its final judgment the court also appointed a special master with all of the powers enumerated in Rule 53 of the Federal Rules of Civil Procedure to administer the fund and take all necessary ministerial steps to effectuate the settlement. These powers included power to receive all proofs of claim, pass on the validity of same, direct the giving of notice to interested persons of hearings on disputed claims, conduct any necessary hearing, submit his reports thereon, and in general supervise the administration of the settlement and decide all disputed questions of law and fact connected therewith, subject to confirmation by the court. Neither the court nor the special master had title to the settlement fund for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts. The ruling held that the settlement fund was not "property held in trust" within the meaning of IRC § 641(a) and the special master was not a "fiduciary" within the meaning of IRC § 7706(a)(6).

Under Rev. Rul. 82-177, a bank that merely holds money for an estate and pays interest on the account, but performs no administrative duties was not a fiduciary.

In each of the above rulings, the question of whether the person was a fiduciary really boiled down to whether the person's actions were comparable to

Advanced Estate Planning and Administration 2016 1–17 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

those of a trustee. If they were, the person was a "trustee" and by virtue of being a trustee, a "fiduciary." Specifically, the decisions hinged on the discretionary powers of administration and management the person was held to possess. Thus, the powers or degree of control the proposed trust advisor would possess is key. The following memorandum and regulation do not relate directly to IRC 7701; however, they are instructive on how a trust advisor may be treated under that provision based upon the control the trust advisor may exercise and the types of decision the trust advisor may make.

GCM 35797 (5/1/1974) addresses whether a REIT's delegation of authority to a corporation to act as the REIT's investment advisor violated IRC 856(a)(1) requirement that the trust be managed by one or more trustees. The investment advisor was "agent of the Trust" under the advisory agreement with REIT, and was to "undertake certain duties on behalf of and 'subject to the supervision of the trustees'." The investment advisor was held to be an "agent and fiduciary of the Trust."

A REIT must be managed by one or more trustees who has powers meeting the requirement of "centralization of management" under Treas. Reg. § 301.7701-2(c). According to Treas. Reg. § 301.7701-2(c), centralized management exists when there is a concentration of continuing exclusive authority to make business decisions for an organization independent of its members' approval. By delegating authority to the corporation to manage investment operations as an agent of the Trust, the trustees in no way forfeited their continuing authority over the Trust investments. And the shareholders' right to terminate the corporation's investment services did not vitiate the trustees' management powers any more than does their right, recognized by Treas. Reg. § 301.7701-2(c), to remove the trustees.

G. What is trust administration?

The second prong of ORS 316.282(1)(d) provides that a trust is a resident trust if the administration is carried out in Oregon.

In 1997, ORS 316.282(4) was also added, which provides: "The Department of Revenue shall adopt rules defining 'trust administration' for purposes of subsection (1)(d) of this section that include within the definition activities that relate to fiduciary decision making and that exclude from the definition activities related to incidental execution of fiduciary decisions." The term "administration" is used in both clauses of ORS 316.282(1)(d) with regard to trusts in general and to trusts with a corporate fiduciary.

The only definition of "administration" adopted by the Department pursuant to the statutory direction appears in OAR 150-316.282(5). Although the statute directs the Department to adopt a definition that applies to the entirety of subsection (1)(d), the rule that was adopted appears to limit application of the

Advanced Estate Planning and Administration 2016 1–18 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

definition to the context of a corporate fiduciary that performs acts related to a trust in two states:

In this context, "administration" relates to fiduciary decision making of the trust and not to the incidental execution of such decisions. Incidental functions include, but are not limited to, preparing tax returns, executing investment trades as directed by account officers and portfolio managers, preparing and mailing trust accountings, and issuing disbursements from trust accounts as directed by account officers. OAR 150-316.282(5).

Nonetheless, it is likely that a court would look to this rule for assistance in other situations where it is necessary to determine if administration is occurring in Oregon.

Courts in Oregon have not yet addressed this issue; however, the Wisconsin Supreme Court has considered whether a trust was a resident trust based upon the extent of administration occurring in that State. Both cases dealt with Pabst Family Trusts, with different outcomes. Although not binding on an Oregon court, those decisions employ similar vocabulary to that of OAR 150- 316.282(5) and may be persuasive to an Oregon court's decision on whether administration was occurring in Oregon.

In Wisconsin Department of Taxation v. Pabst, 15 Wis. 2d (1961), the Court held that Wisconsin could not tax a trust because administration did not occur in the state:

"To administer the trusts involved would be to manage, direct, or superintend the affairs of these trusts. Weber [a Wisconsin resident] did not perform these functions. The policy decisions were not made by the nonresident trustees. Weber implemented those policy determinations. The trustees decided whether to distribute the income, whether to seek investment advice, and whether ministerial duties should be delegated to someone other than themselves. Ministerial acts performed in Wisconsin included an annual audit made by a Milwaukee certified public accountant and the filing of federal tax returns in the Milwaukee office of the internal revenue department. The activities carried on in Wisconsin were only incidental to the duties of the trustees."

In Pabst v. Wisconsin Department of Taxation, 19 Wis. 2d 313 (1963), the same court held that Wisconsin could tax a different Pabst family trust because administration did occur in the state. The court stated, "The keyword of the statute, insofar as this appeal is concerned, is 'administered'. In Wisconsin Department of Taxation v. Pabst, we had before estate application of the same statute to other trusts. . ."

Advanced Estate Planning and Administration 2016 1–19 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

That decision used the definition of 'administer' in Webster's Third New International dictionary which stressed the element of managing, directing, or superintending affairs. The court changed course, stating:

"Nevertheless, upon further consideration we now conclude that the statutory word administered as applied to an inter vivos trust of intangibles means simply conducting the business of the trust. The problem of determining whether such a trust is administered in Wisconsin may be made more difficult when the business of the trust is partly conducted in other states as well as in Wisconsin. In such a situation, a proper application of the statute would appear to require the conclusion that the trust is being administered in Wisconsin within the meaning of the statute if the major portion of the trust business is conducted in Wisconsin."

The court concluded it was proper to tax the trust in Wisconsin because "Wisconsin has extended the protection of its laws to the activities of Weber in carrying on the business of the trust at the office of Pabst Farms, Inc.," the only office of the trust was maintained in Wisconsin, and the major portion of the trust business was transacted there.

In the Wisconsin decisions, there was some administration occurring in both states. However, the Wisconsin courts looked to the significance of the Wisconsin activities in determining whether the trust was taxable in Wisconsin. Whether an Oregon court would apply the Oregon statute as involving "any administration" or "principal administration" might depend upon the persuasiveness of the Wisconsin decisions.

H. Trust advisors and protectors. Modernly, trust settlors are creative about trust management, and frequently appoint advisors who can direct various specified actions of the trustee. Would an Oregon-resident advisor subject the trust to Oregon income tax?

If the question is answered by application of federal law principles, it will depend upon the scope of their authority. As discussed above, the question turns on whether the advisor's role is merely advisory, or whether the advisor can actually control any of the essential functions of the trustee.

The typical trust protector, whose powers are limited to removing and replacing trustees, should ordinarily not be considered a fiduciary even if the protector's actions are subject to fiduciary duties. However, it would seem to be a closer question if the protector had the power to appoint himself or a subordinate party as trustee.

While estate inclusion is not the relevant inquiry, that sphere of analysis may be instructive. Treas. Reg. §20.2041-1(b)(1) provides that a donee may have a general power of appointment if he has the power to remove or discharge a

Advanced Estate Planning and Administration 2016 1–20 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

trustee and appoint any other person including himself; that is, he is deemed to have the power of the trustee.

Under that logic, the power to make oneself the trustee could be argued to be the equivalent of being the trustee. However, attribution principles are relevant to estate inclusion, but may not be relevant to the application of ORS 316.282(1)(d). The power to become the trustee is not the same as being the trustee, and does not change the fact that someone else is currently the trustee. That power may be nothing more than the unexercised power to change the place of administration of the trust.

The IRS has ruled over the years that limiting possible appointees to individuals who are not related or subordinate to the beneficiary in a manner consistent with the IRS's position in Rev. Rul. 95-58 avoids estate tax inclusion under IRC § 2041. In Rev. Rul. 94-58, the IRS held that a decedent/grantor's reservation of an unqualified power to remove a trustee and appoint an individual or corporate successor that is not related or subordinate to the decedent within the meaning of § 672(c) is not considered a reservation of the trustee's discretionary powers of distribution over the property transferred by him to the trust. (emphasis added). See Estate of Vak v. Commissioner, 973 f.2D 1409 (8th Cir. 1992) (decedent had not retained dominion and control over assets transferred to a trust by reason of his power to remove and replace the trustee with a party that was not related or subordinate to the decedent). This same analysis was applied to a beneficiary in PLR 9735023, where the IRS determined that a beneficiary of a trust would not have the distribution powers held by an independent trustee attributed to her where she had the power to remove and replace the trustee only with a successor trustee who was not related or subordinate to her within the meaning of §672(c).

The question arises as to whether a beneficiary's attorney would be considered to be subordinate to the beneficiary under §672(c) as an "employee." The term seems not to include the beneficiary's (or grantor's) lawyer, accountant, or trust company. See Zand v. Commissioner, 71 TMC 1758 (196), aff'd on other ground, 143 F.3d 1393 (11th Cir. 1998); Estate of Hilton W. Goodwyn, 35 TMC 1026, 1038 (1976) (holding that the lawyer-trustees were not "related or subordinate parties" to the grantor and were "independent trustees" within the meaning of § 674(c)); PLR 200822008 (Because A's only relationship to the grantor was that of grantor's independent attorney, A did not meet the definition of a related or subordinate party under §672(c)); Westfall, Trust Grantors and Section 674: Adventures in Income Tax Avoidance, 60 Colum. L. Rev. 326, 340 (1960). Presumably this is based upon the attorney's duty not to subordinate the attorney's professional judgment to that of another person.

Based upon the foregoing, it would seem that a protector would not be considered a fiduciary, although the result seems more clear if the protector cannot appoint himself or a subordinate as trustee.

Advanced Estate Planning and Administration 2016 1–21 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

I. Addressing the hypothetical scenario. Unfortunately, there is no easy solution to the hypothetical scenario. To avoid Oregon income taxation, the trust would have to overcome two obstacles: (1) establish that OAR 150- 316.282(4) is invalid; and (2) establish that trust administration for purposes of ORS 316.282(1)(d) and OAR 150-316.282(3) means significant administration as opposed to any administration. Both of these points would be hotly contested by the Oregon Department of Revenue, and appeal to the Oregon Supreme Court should be expected.

From a practical standpoint, taking that position is awkward. The trust has never filed an Oregon income tax return before, since it was not previously subject to Oregon tax. If the trust is still not subject to Oregon tax, then no return would need to be filed. However, with no return filed, the statute of limitations would never even start to run, and the risk would grow with each unfiled return. The cautious approach would be to file and pay Oregon tax, then sue for a refund. However, that approach will almost insure a battle with ODR.

The Oregon co-trustee could resign, which would eliminate the problem going forward. There would still be exposure for the time that the co-trustee lived in Oregon, but at least that is a finite risk.

The co-trustee could become a protector after resignation, assuming that the trust could be modified to allow that. That would give the co-trustee the power to name an acceptable co-trustee, which might assuage concerns about resignation.

IV. Changing Trust Situs.

A. Why Change the situs of a trust? A great percentage of estate plans involve trusts. People are mobile. Today's smart estate planner will recognize that and address trust income taxation when designing the estate plan. Although the estate plan is created while the client is an Oregon resident, the client might move to another state before death. Family beneficiaries are often spread among multiple states, or subsequently move due to educational opportunities, career opportunities, marriage, and many other reasons. Individual trustees can also move to different states. Multiple trustees in different states, or mismatches between the residency of the trustee and beneficiary can result in undesirable income tax consequences. Changing the tax consequences often requires a situs change, a trustee change or both.

The smart estate planner will recognize these facts of modern life and design trusts so they can be moved to a new situs whenever doing so becomes advantageous. That requires a change in the place of administration, which may practically require a change of the trustee.

Advanced Estate Planning and Administration 2016 1–22 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

B. General rules.

1. Situs. A trust's situs is usually the state where is its principal place of administration occurs.

2. Applicable law. Unless the trust provides otherwise, matters of validity and construction are governed by the law of its state of creation. Matters of trust administration are governed by the law of its situs from time to time.

3. State taxation. States are free to tax a trust as they choose, so long as they have sufficient contacts with the trust to create a constitutional basis for taxation.

C. Oregon statutory provisions of relevance.

1. ORS 130.022 UTC 108. Principal place of administration.

(2) A trustee is under a continuing duty to administer the trust at a place appropriate to the trust’s purposes, the trust’s administration and the interests of the beneficiaries. Absent a substantial change of circumstances, the trustee may assume that the original place of administration is also the appropriate place of administration. The duty to administer the trust at an appropriate place may prevent a trustee from moving the place of administration.

(3)(a) A trustee may transfer the trust’s principal place of administration to another state, country or other jurisdiction if the transfer is in furtherance of the duty imposed by subsection (2) of this section.

(b) A trustee shall notify qualified beneficiaries of the trust of a proposed transfer of the trust’s principal place of administration not fewer than 60 days before initiating the transfer. The notice of proposed transfer must include all of the following:

(A) The name of the state, country or other jurisdiction to which the principal place of administration is to be transferred.

(B) The address and telephone number at the new location at which the trustee can be contacted.

Advanced Estate Planning and Administration 2016 1–23 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

(D) The date on which the proposed transfer is anticipated to occur.

(E) The date by which the qualified beneficiary must notify the trustee of an objection to the proposed transfer. The date for notifying a trustee of an objection may not be fewer than 60 days after the date on which the notice is given.

(c) The authority of a trustee under this subsection to transfer a trust’s principal place of administration terminates if a qualified beneficiary notifies the trustee of an objection to the proposed transfer on or before the date specified in the notice.

(d) The trustee may transfer some or all of the trust property to a successor trustee designated in the terms of the trust or appointed pursuant to ORS 130.615 in connection with a transfer of the trust’s principal place of administration.

2. ORS 130.045 UTC 111. Nonjudicial settlement agreements.

(3)(a) Except as otherwise provided in subsection (4) of this section, interested persons may enter into a nonjudicial settlement agreement with respect to any matter involving a trust.

(4) A nonjudicial settlement agreement is valid only to the extent the agreement does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court under this chapter or other applicable law.

(5) Matters that may be resolved by a nonjudicial settlement agreement include:

(d) The resignation or appointment of a trustee or cotrustee and the determination of a trustee’s compensation.

(e) Transfer of a trust’s principal place of administration.

3. ORS 130.625 UTC 706. Removal of trustee.

(2) A court may remove a trustee if the court finds:

Advanced Estate Planning and Administration 2016 1–24 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

(d) Removal of the trustee best serves the interests of all of the beneficiaries and:

(A) There has been a substantial change of circumstances or removal has been requested by all of the qualified beneficiaries;

(B) A suitable cotrustee or successor trustee is available; and

(C) The trustee fails to establish by clear and convincing evidence that removal is inconsistent with a material purpose of the trust.

4. Use of protector. The simplest way to change the trustee is to appoint a trust protector who has the power to remove and replace a trustee. The trust should be clear that the protector can make the change for any reason, and ideally provide for an orderly transition. Reliance on trust modifications, court actions, etc. can be risky. Some states (e.g., California and New York) impose sometimes insurmountable barriers to changing to an out-of-state trustee, often believed to reflect a desire to preserve the state's tax revenue.

5. Different trustees. Be clear that the trust protector can name different trustees for different trusts. For example, three trusts for three children, each living in a different state, might benefit from three different trustees and situses.

6. Different trustee roles. Create a mechanism where the trust protector can name multiple trustees with each having a defined role. To explain, consider that a trustee generally serves three separate roles: (i) administering the trust; (ii) investing trust assets; and (iii) making distributions to beneficiaries. If the trust's income taxation is or can be based upon the place of administration, a trustee in a non-taxable state can be designated as the administrative trustee, and given sole authority to administer the trust and no other duties or responsibilities. The trust can have a second investment trustee and a third distribution trustee, or just a second trustee with those functions combined without affecting the state income taxation.

7. Avoid separate share trusts. Separate share trusts can be a one-size-fits-all straightjacket that forces the trust to be taxed under the rules of one state. They should be avoided. If you must use them, at least grant the trustee or the trust protector the authority to divide them into separate trusts if that should become advantageous.

Advanced Estate Planning and Administration 2016 1–25 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

8. Decanting. Since you can't always know what is going to happen, consider giving the trustee the power to decant the trust. Oregon does not have a decanting statute, but specific provisions in the trust that allow decanting will work. If you are concerned about the scope of the decanting power, you can limit it as you believe appropriate.

Advanced Estate Planning and Administration 2016 1–26 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

Advanced Estate Planning and Administration 2016 1–27 Chapter 1—One Foot in Each State: Planning and Administering the Multistate Estate

Advanced Estate Planning and Administration 2016 1–28 Chapter 2 Charitable Deductions

Penny Serrurier Stoel Rives LLP Portland, Oregon

Contents I. General Rules of Charitable Giving ...... 2–1 A. Gifts During Life: Income Tax Consequences 2–1 B. Gifts After Death: Estate Tax Consequences ...... 2–7 II. Split-Interest Gifts ...... 2–11 A. Charitable Remainder Trusts ...... 2–11 B. Charitable Lead Trusts ...... 2–14 C. Pooled Income Funds ...... 2–15 D. Charitable Gift Annuities ...... 2–15 E. Gift of Remainder Interest in Personal Residence or Farm ...... 2–16 F. Qualified Conservation Contributions ...... 2–17 III. Foundations ...... 2–17 A. Private Foundations ...... 2–17 B. Community Foundations and Advised Funds ...... 2–19 C. Supporting Organizations ...... 2–20 Chapter 2—Charitable Deductions

Advanced Estate Planning and Administration 2016 2–ii Chapter 2—Charitable Deductions

I. GENERAL RULES OF CHARITABLE GIVING

A. Gifts During Life: Income Tax Consequences.1

In general, a donor may deduct for income tax purposes the fair market value of an item donated to a qualified charity. However, the total charitable deduction that a donor may take in a given year is subject to adjusted gross income percentage limitations. In addition, certain donated property is subject to specific rules that may reduce the amount of the charitable deduction. Following is a list of types of property and the percentage limitations and reduction rules applicable to each.

1. Gifts of Cash. Deductible up to 50 percent of the donor’s adjusted gross income. IRC §170(b)(1)(A); Treas Reg §1.170A-8. Any contributions in excess of the deduction limitation may be carried forward for the following five years. IRC § 170(d)(1); Treas Reg § 1.170A-10(a). Cash gifts are deductible only if the donor keeps a bank record of the transaction (e.g., a check or credit card statement) or a written receipt from the charity providing the date and amount of the contribution. A donor needs a receipt from the charity to claim a deduction of $250 or more. See I.A.12, below.

2. Gifts of Securities and Real Estate.

a. Long-Term Capital Gain Property. Property held for more than one year is deductible at the full present fair market value, with no tax on the appreciation. IRC § 170(e). However, the deduction is limited to 30 percent of the donor’s adjusted gross income. IRC § 170(b)(1)(C)(i); Treas Reg § 1.170A 8(d)(1). Any contributions in excess of the limitation may be carried forward for the following five years. IRC § 170(b)(1)(C)(ii). There is a “step-down” election where a donor may elect to increase the ceiling on the deduction to 50 percent of adjusted gross income (with a five-year carryover for any excess). However, the donor must then reduce the amount of the deduction for all long-term property gifts made during the year by 100 percent of the appreciation (i.e., deduct the basis of the property rather than the full fair market value) and must similarly reduce the deduction for long-term property gifts being carried over from earlier years. IRC § 170(b)(1)(C)(iii) and (e)(1)(B); Treas Reg § 1.170A-8(d)(2). The “step-down” election cannot be revoked after the tax return’s due date.

b. Short-Term Capital Gain Property. For property held for one year or less, the donor’s deduction is limited to the cost basis of the property. IRC §170(e)(1)(A). Deductible up to 50 percent of the donor’s adjusted gross

1 Unless otherwise stated, the limitations discussed in this section assume that an individual is gifting to “public charities” such as schools, hospitals, churches, or “publicly supported” organizations. Gifts to most types of private foundations are subject to additional restrictions on deductibility. See discussion at section I.A.8., below.

Advanced Estate Planning and Administration 2016 2–1 Chapter 2—Charitable Deductions

income. IRC §170(b)(1)(A). Five-year carryover allowed for any excess. IRC § 170(d)(1); Treas Reg §1.170A-10.

PRACTICE TIP: If property has a fair market value lower than its basis, the donor should consider selling the property and contributing the proceeds, thereby taking advantage of the capital loss for income tax purposes.

3. Ordinary Income Property (Sale Would Result in Ordinary Income). Deduction is limited to cost basis. Examples of ordinary income property are inventory, crops, artwork or other works subject to copyright created by the donor, certain types of stock, and certain partnership property. IRC § 170(e)(1)(A). Deductible up to 50 percent of the donor’s adjusted gross income. IRC § 170(b)(1)(A). Five-year carryover allowed for any excess. IRC § 170(d)(1); Treas Reg §1.170A 4(b)(1).

4. Tangible Personal Property. Examples of tangible personal property include artwork, antiques, books, and collectibles. Clothing and household items (furniture, electronics, appliances) are subject to a special rule which prohibits any deduction unless the items are in “good used condition or better.” IRC § 170(f)(16). The reduction rules applicable to tangible personal property depend on whether the use of the property by the charity will be “related” to its exempt function. For example, a gift of a painting to a museum for display would be a related use, while a gift of the same painting to a hospital would be an unrelated use. Treas Reg § 1.170A-4.

a. Related Gifts. If the gift is related to the charity’s exempt function, the deduction is for full fair market value. IRC § 170(e)(1)(B)(i). However, the deduction is limited to 30 percent of the donor’s adjusted gross income. IRC § 170(b)(1)(D)(i). Five-year carryover allowed for any excess. IRC § 170(d)(1). The “step-down” election described above in Section 2.a. is also available so that the donor may raise the ceiling on the deduction limitation from 30 percent to 50 percent of adjusted gross income but would then be limited to deducting the cost basis of the property.

b. Unrelated Gifts. If gift is unrelated to donee’s exempt function, deduction must be reduced by the amount of gain that would have been long-term capital gain had the property been sold at its fair market value (i.e., deduction limited to basis).2 IRC § 170(e)(1)(B). Deductible up to 50 percent of adjusted gross income. IRC § 170(b)(1)(A). Five-year carryover allowed for any excess.

PRACTICE TIP: Donors often contribute tangible personal property to charity rummage sales or auctions. Because the items are donated to the charity for sale, the use is “unrelated” and the donor’s deduction is reduced by the amount of long-

2 IRC § 6050L requires charities that receive and then sell donated property to report the sale price to the IRS (with a copy to the donor) if the property is sold within three years of donation. (Form 8282)

Advanced Estate Planning and Administration 2016 2–2 Chapter 2—Charitable Deductions

term gain. In most instances, the reduction rule is meaningless because the fair market value of the item is less than its basis (e.g., used clothing). However, a donor can lose a substantial deduction by donating valuable items such as art or antiques to a charitable auction since the donor will be limited to a charitable deduction for the item’s basis.

PRACTICE TIP: Although income tax charitable deductions generally are not allowable for remainder interests in tangible personal property, a deduction is allowed for gifts of undivided interests – e.g., an undivided one-sixth interest in a painting given to museum, with the museum having possession two months each year.

5. Retirement Assets. The fundamental rule that applies to retirement accounts still applies when retirement assets are given to charity during life: A donor must recognize income when assets are withdrawn from a retirement account. Donors who itemize can claim a charitable deduction for the amounts donated to charity, subject to the adjusted gross income deductibility ceilings and carryover rules discussed above. In 2006, Congress created the “IRA Charitable Rollover” as a limited exception to the general rule. The exception provides that a donor who is age 70 1/2 or older can make a direct charitable contribution from an IRA of up to $100,000 per year to a qualified charity (in general—a “public charity,” but not a supporting organization, donor-advised fund, or charitable remainder trust). A donor who qualifies for this exception can exclude the amount of the contribution from his or her taxable income. The charitable rollover was made permanent by Congress effective January 1, 2016.

a. IRAs Only. The IRA charitable rollover works only for traditional and Roth IRAs. Distribution from SIMPLE IRAs, SEPs, Keoghs, 403(b)s, 401(k)s, and profit-sharing plans do not qualify.

b. Details. Distributions must be direct from the IRA administrator to the charity, and the charity must issue a timely written acknowledgment to the donor stating that it has received the IRA distribution and that no goods or services were received in exchanged for the contribution. Any benefits received back (e.g., a dinner at the charity gala) will disqualify the entire distribution.

CAVEAT: There is no charitable deduction for the charitable IRA rollover. But excluding the amount from income is a better result for many taxpayers. The distribution amount is included in the donor’s RMD for the year. There are special allocation rules (favorable to the taxpayer) that apply when making a gift from an IRA account that consists of both deductible and non-deductible contributions.

6. Bargain Sales. A bargain sale is a sale of property where the sale price is less than the property’s fair market value. If a bargain sale is made to a charity, the donor

Advanced Estate Planning and Administration 2016 2–3 Chapter 2—Charitable Deductions

may receive a charitable deduction for the difference between the fair market value and sale price. IRC § 170(e)(2). However, the cost basis of the property must be allocated between the portion of property “sold” and the portion of the property “given” to charity on the basis of the fair market value of each. Appreciation allocable to sale is subject to capital gains tax; appreciation allocable to the gift is not. IRC § 1011(b).

CAVEAT: An outright gift of mortgaged property is considered a bargain sale. Treas Reg §1.1011-2(a)(3).

7. Services. No charitable deduction allowed for the value of personal services rendered free for charity. Treas Reg § 1.170A-1(g). But see discussion in Section I.A.11.g. below regarding the deductibility of out-of-pocket expenses paid by the donor in rendering volunteer services.

8. Rent-Free Use of Property by Charity. No income tax charitable deduction for the value of rent-free use of property. IRC § 170(f)(3)(A); Treas Reg § 1.170A-7(a). Similarly, a donor who contributes rent-free use of a vacation home to a charity is not entitled to a charitable deduction. Moreover, the donated time counts as the donor’s “personal use.” Rev Rul 89-51, 1989-1 C.B. 89. (Does not create a problem if the donor treats the property as a personal residence when deducting mortgage interest, but it could be problematic for a donor who treats a vacation home as rental property.)

9. Gifts to Private Foundations (Other Than Private Operating Foundations).

a. General Rule. Gifts of cash to a private foundation are subject to a deduction limitation of 30 percent of a donor’s adjusted gross income. Deductions for gifts of long-term capital gain property of any kind are subject to a 20 percent adjusted gross income limitation deduction and, except as described below in b., are limited to a deduction of the lower of cost basis or fair market value. IRC § 170(e)(1)(B)(ii). Donors who give to both a public charity (a 50-percent type organization) and a private foundation (a 30-percent type organization) in a given year must calculate their deduction under the 50-percent limitation first. All amounts in excess of the deduction limitations may be carried over for the following five years.

b. Special Rule for Gifts of Qualifying Publicly Traded Securities. Gifts to a private foundation of qualifying public traded securities may be deducted at full fair market value. IRC § 170(e)(5)(A). The securities must be the type for which market quotations are readily available on an established securities market. Mutual fund shares also count under this rule so long as market quotations for the fund are published daily in readily available newspapers. Treas Reg §1.170A-13(c)(7)(xi)(A)(2). The IRS has taken the position that stock subject to Rule 144 restrictions is not qualified appreciated stock. PLR 9247018.

Advanced Estate Planning and Administration 2016 2–4 Chapter 2—Charitable Deductions

c. Special Rule for Certain Types of Private Foundations. Private operating foundations and pass-through foundations are treated essentially as public charities for purposes of calculating the deduction and the donor’s AGI percentage limitations.

10. When is a Contribution Deductible for Income Tax Purposes? In general, a charitable contribution can be deducted by a donor only in the year in which it is paid, regardless of the donor’s accounting method. A pledge to make a donation is not enough – the amount must actually be paid before the deduction can be taken.

a. Gifts by Check. Gifts by check are effective when the check is unconditionally delivered or mailed. Therefore, if a check is mailed prior to the end of the year, it is still deductible even though it may not clear the donor’s bank account until the following year. Treas Reg § 1.170A-1(b). A post-dated check is not an unconditional payment – it is merely a promise to pay at a later date and is not deductible until the later of the date of delivery or the date on the check.

b. Gifts of Securities. If mailed, date of mailing is effective date; if hand-delivered to charity, date received by charity is effective date. If securities are delivered to the donor’s bank or broker (as donor’s agent) or to the issuing corporation (or its agent) instructing the corporation to reissue in the charity’s name, the delivery date is the date that the securities were transferred to the charity’s name on corporation’s books.

c. Gifts of Artworks and Other Tangible Personal Property. Effective on the date that the charity unconditionally receives the property.

d. Real Estate Gifts. Effective on the date that the charity receives a properly executed deed. However, if the deed must be recorded to pass title under local law, the delivery date is the date that the deed is recorded.

e. Credit Card Gifts. Charitable contributions made using a bank credit card are deductible when the bank pays the charity. Because the use of a credit card creates the cardholder’s own debt to a third party, it is treated like the use of borrowed funds to make a contribution. Rev Rul 78-38, 1979-1 CB 67.

11. Valuation of Charitable Contributions. The deduction for a gift of property generally is based on the property’s fair market value. However, the deduction may be reduced because of the rules outlined above. Following is a list of property and the appropriate method for obtaining a fair market value figure for each type of property:

a. Securities. Listed securities such as publicly traded stocks or bonds are valued at the mean between highest and lowest quoted selling prices on the valuation date (the date of delivery). Treas Reg § 20.2031-2(b) and 25.2512-2(b).

Advanced Estate Planning and Administration 2016 2–5 Chapter 2—Charitable Deductions

If there is not a market for securities on a stock exchange or over the counter, the fair market value is the mean between the bona fide bid and asked prices on the date of delivery. Reg. §§ 20.2031-2(c) and 25.2512-2(c).

b. Mutual Funds. Mutual fund shares are valued as of the redemption price on the date of delivery.

c. Real Estate, Works of Art, and Other Property Not Traded on an Exchange or Over the Counter. Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Treas Reg § 1.170A-1 (c). In general, any donated property worth more than $5,000 must be appraised. The Treasury Regulations set out very strict appraisal requirements. A “qualified appraisal” must be obtained and a fully completed “appraisal summary” must be attached to Form 8283. See Treas Reg § 1.170A-13(c)(1), et al.

d. Vehicles. Concerns about abuse in vehicle donating programs run by charities have led to a special rule limiting the deduction for a car donation to the actual sale price of the car when it is sold by the charity.

e. Partnership and LLC Interests. In addition to the qualified appraisal rules that may apply to the donation of this type of property, contributions of partnership and LLC interests require additional analysis - the explanation of which is beyond the scope of this article. In a nutshell, IRC § 170(e)(1)(A) requires that the contribution be reduced by the amount of ordinary income or short term gain that would have been recognized if the interest were sold. If the partnership or LLC has debt, the contribution may invoke the bargain sale rules under IRC § 1011.

f. S Corps. Contributions of S corporation shares have similar issues to those stated above with respect to contributions of partnership and LLC interests.

g. Unreimbursed Volunteer Expenses. Certain expenses may be deductible when incurred in rendering services for charity. Rev Rul 55-4, 1955-1 CB 291. Ceiling is 50 percent of adjusted gross income, with a five-year carryover.

(i) Travel Expenses. Volunteers whose duties keep them away from home overnight may deduct reasonable payments for meals and lodging as well as travel costs. However, deductions for unreimbursed charitable travel expenses will be disallowed if there is a significant element of personal pleasure, recreation, or vacation in the travel. IRC § 170(k).

Advanced Estate Planning and Administration 2016 2–6 Chapter 2—Charitable Deductions

(ii) Unreimbursed Automobile Expenses. Donors who use their automobiles in rendering gratuitous services to charitable organizations may deduct their gas, oil, tolls, and parking costs (but not insurance and depreciation); or they may deduct a standard cents-per-mile rate in computing the cost of operating the automobile while volunteering.

12. Substantiating Charitable Deductions. The charity’s receipt must provide (1) the amount of cash and a description (but not the value) of any property contributed; (2) whether anything of value was given to the donor in exchange for the gift; and (3) if the donor did receive something from the charity, a description and good faith estimate of the value given. Gifts of cash under $250 are deductible only if the donor retains a bank record of the transaction, or if the charity issues a receipt stating the date and amount of the gift. Of course, regardless of whether a donor has a receipt, the IRS may challenge the deduction for other reasons (e.g., the charity is not qualified, the value placed on the gift by the donor or the charity is inflated, the donor received a benefit).

a. Contributions of $250 or More. Donors must have a receipt from a charity to claim a charitable deduction of $250 or more. A canceled check without a receipt is insufficient.

b. Noncash Contributions over $500. A donor who contributes property over $500 must file a Form 8283 with his or her 1040. Form 8283 requires a description of the property, name and address of donee, date of contribution, and the value of the property. A gift for which an income tax charitable deduction of over $5,000 is claimed requires a qualified appraisal and an appraisal summary (other than for gifts of cash or other easily valued property such as publicly traded securities).

13. Gift Tax Rules. Present-interest gifts under $14,000 per donee are not required to be reported on Form 709. Outright gifts of cash or property are generally not required to be reported assuming they qualify for the gift tax charitable deduction. However, if a client is otherwise required to file a gift tax return, all gifts to be charities must be included on the return. In general, split-interest gifts must always be reported on a Form 709 (See Section II, below).

B. Gifts After Death: Estate Tax Consequences.

In general, gifts to a charity after death (through a bequest in a will or a transfer under a trust agreement) are deductible for estate tax purposes at full fair market value and are not subject to any of the deduction limitations discussed above in Section A. Unlike the complex rules that govern the income tax charitable deduction, there is no limit on the total estate tax charitable deduction, no requirement that the deduction for capital gain or other property be limited to basis, and no distinction made among types of charitable organizations or the use of

Advanced Estate Planning and Administration 2016 2–7 Chapter 2—Charitable Deductions certain charitable bequests. Most people are aware of the income tax advantages associated with charitable giving. However, the estate tax benefits of charitable giving can also be substantial and should be considered as part of an overall estate plan.

1. General Rules.

a. Deduction. Bequests to qualified charitable organizations are deductible in determining the net taxable estate of a decedent. The amount deductible is the fair market value of the property at the date of death. IRC § 2055(a); Treas Reg § 20.2055-1(a). For the most part, the estate tax rules track the income tax rules regarding which organizations qualify as charitable organizations for purposes of the estate tax charitable deductions.

PRACTICE TIP: Many non-profit organizations are non-charitable organizations, such as Section 501(c)(4) organizations (social welfare organizations) or Section 501(c)(6) organizations (trade associations). Those types of organizations do not qualify for the estate tax deduction under Section 2055(a). If you are relying on the charitable deduction for tax planning purposes and you are not sure about the exempt status of a particular organization, confirm it on GuideStar.org or contact the organization.

PRACTICE TIP: When naming a charitable beneficiary in a will or trust, it is not necessary to include specific data such as the charity’s street address or telephone number. However, there should be enough information to clearly identify the charity. In particular, be aware of charities with similar names (e.g., Guide Dogs), and charities with both a local and a national office. Make sure you know which organization your client wants to give to, and be clear in your drafting.

PRACTICE TIP: If a married couple shares a strong charitable intent, consider an outright bequest to the surviving spouse of the amount of the intended charitable gift. The spouse can then make the gift to charity and obtain an income tax benefit. The amount will not be taxable in the estate, as it will be protected by the marital deduction.

b. Substantiating the Deduction. The IRS may require proof during the audit of an estate tax return that a recipient of a bequest is a qualified charity under IRC Section 2055(a). The best evidence is a copy of the organization’s determination letter. Actuarial calculations will be required for split-interest gifts (regardless of whether there is an audit).

c. Private Foundations Versus Public Charities. As stated above, unlike the income tax, there is no distinction made for estate tax purposes between a bequest to a private foundation and a public charity. However, a deduction for a bequest to a private foundation where the private foundation is in violation of the

Advanced Estate Planning and Administration 2016 2–8 Chapter 2—Charitable Deductions

IRS operating restrictions governing private foundations will be disallowed under Section 2055(e)(1).

2. Ways to Give Under a Will or Trust

a. Specific Bequest. An outright bequest is the simplest means of obtaining an estate tax charitable deduction. Note that under Oregon law, pecuniary bequests not in trust ordinarily do not carry out income, so if you want the charity to be entitled to a share of the income of the estate during the period of administration, you must include such language in the will. Sample language for an outright bequest is as follows:

“I bequeath [property] [the sum of $______] to [charity], [city, state]. If on the date of my death [charity], or its lawful successor, is not in existence or is not a charitable organization as defined in Section 2055 of the Internal Revenue Code of 1986, as amended, or the corresponding provisions of any future federal tax laws, this bequest shall lapse, and the amount shall pass [as a part of the residue of my estate.] [Optional] The charitable bequest in this Section shall be deemed to be a bequest entitled to share in the income of my estate, and the legatee shall receive its proportionate share of the income of my estate determined as if it were a legatee of a pecuniary bequest in trust in accordance with ORS 116.007(2)(b).”

b. Residuary Bequest. Residuary bequests are best expressed through a percentage or fractional share. Sample language is as follows:

“I devise and bequeath the remaining share of the residue of my probate estate as follows: ___ percent to [charity], [city, state]. If on the date of my death [charity], or its lawful successor, is not in existence or is not a charitable organization as defined in Section 2055 of the Internal Revenue Code of 1986, as amended, or the corresponding provisions of any future federal tax laws, this bequest shall lapse, and the amount shall pass [in equal shares to the remaining residuary beneficiaries].”

PRACTICE TIP: Beware of the tax effects of a residuary charitable bequest if the estate tax is to be paid out of the residue. See 4., below.

3. IRD Assets. A will or trust can only claim a charitable income tax deduction for amounts paid pursuant to the terms of the governing instrument. IRC § 642(c)(1); Treas Reg § 1.642(c)(1)(a)-1. When dealing with assets that have income in respect of a decedent (“IRD”), such as an IRA, make sure you either name a charity as the direct beneficiary of the asset, or have the asset pass to the residue and fund a residuary bequest to charity. Do not use an IRD asset to fund a pecuniary bequest to charity or the estate will have to recognize income from the IRD asset. For example, if an IRA names an

Advanced Estate Planning and Administration 2016 2–9 Chapter 2—Charitable Deductions

estate as beneficiary and the estate then uses $100,000 of IRA assets to fund a pecuniary charitable bequest, the entire $100,000 will be subject to income tax and will not be eligible for an income tax charitable deduction. A safety net in the event the beneficiary designation fails is to have a provision in the will or trust that requires that all charitable bequests be fulfilled first with IRD assets to the extent the estate or trust has IRD.3

4. Tax Clause Issues. It is important to note that any estate tax charitable deduction must be reduced by the amount of estate tax payable out of the charitable share. Where estate taxes are payable out of a charitable share so that the amount passing to charity will be reduced by the amount of the tax, the resulting decrease in the amount passing to charity will further reduce the amount of the charitable deduction. The smaller deduction will mean a larger taxable estate, which will increase the tax and again reduce the charitable deduction – and the cycle keeps repeating itself. To finally determine the tax, you need to perform an interrelated calculation. This effect is not necessarily disastrous, so long as the client understands that paying tax out of the charitable share will reduce the amount passing to charity and increase the amount of tax that the government would otherwise receive.

5. Fiduciary Income Tax Issues. In general, an estate may deduct any amount of income that under the terms of the governing instrument is paid for a charitable purpose. IRC § 642(c)(1). An estate may also deduct amounts of income permanently set aside (but not yet paid) for a charity. Trusts generally do not qualify for this “set-aside deduction.” Most types of trusts must actually pay income to a charity to obtain an income tax deduction. Note that the Internal Revenue Code requires that the payment of income to a charity must be authorized by the governing instrument. If there is no governing instrument, or the instrument is silent, local law applies. Under Oregon law, residuary charitable bequests carry out income. Pecuniary bequests not in trust do not. ORS 116.007. Therefore, if you want to take a charitable income tax deduction on the Form 1041 for amounts of income paid to charity, there must be specific language authorizing the payment of income to charity for most non-residuary charitable bequests. (See section I.B.2.a., above.)

CAVEAT: Note that for estate or trust contributions to be deductible for income tax purposes, they must be paid out of income and not principal. Rev Rul 2003- 123, 2003-2 CB 1200. Capital gain – which ordinarily is allocated to corpus – may also be deducted if paid to or permanently set aside for a charity during the tax year that it is earned. Treas Reg § 1.642(c)-3.

3 Note however the “economic effect” regulation Treas Reg § 1.642(c)(3)(b)(2) which can cause the charitable income tax deduction to be less than the amount of IRD distributed to the charity.

Advanced Estate Planning and Administration 2016 2–10 Chapter 2—Charitable Deductions

II. SPLIT-INTEREST GIFTS

Split-interest gifts, sometimes called “deferred gifts” are gifts in which the donor gives property to a charity and retains an interest. The donor gets a current income tax deduction by irrevocably donating property to a charity while retaining an interest in the property. Not surprisingly, split-interest gifts are highly regulated by the Internal Revenue Service. Only very specific types of transactions are approved by the IRS as split-interest gifts, and a defective split- interest gift may be denied an income tax deduction as well as a gift or estate tax deduction. Therefore, caution must be exercised in drafting or reviewing any of the following giving vehicles.4

A. Charitable Remainder Trusts

In general, a charitable remainder trust is a trust that provides for a specified distribution, at least annually, to one or more (non-charitable) beneficiaries, for life or for a term of years (not to exceed 20), with an irrevocable remainder interest to be paid to a qualified charitable organization. Treas Reg § 1.664-1(a)(1)(i). The value of the charitable remainder interest cannot be less than ten percent of the donation to the trust. Charitable remainder trusts permit donors to retain a lifetime income stream while allowing them to achieve the emotional satisfaction of gifting while they are still alive. Charitable remainder trusts also have many collateral benefits for a donor. For example, a donor can diversify assets or sell a business and avoid capital gains tax by establishing a remainder trust, contributing the assets, and later having the trust sell the assets and purchase other assets. When the income tax savings are added to the estate tax savings and avoidance of tax on changing appreciated investments is taken into account, substantial charitable gifts can often be made at a much lower cost than through conventional gifting. In addition to use as a lifetime gifting vehicle, charitable remainder trusts can also be used in a will or revocable trust where the remainder trust is funded after the death of the testator/settlor. This allows a donor to make charitable gifts, reduce estate tax, and still provide life income and money management for a surviving beneficiary.

1. Charitable Remainder Unitrust (“CRUT”). A unitrust specifies that the income beneficiary (or beneficiaries) will receive annual payments determined by multiplying a fixed percentage (which cannot be less than five percent nor more than 50 percent) by the net fair market value of the trust assets, as determined each year. On death of the beneficiary (or the survivor beneficiary, if more than one), a charity gets the remainder. IRC § 664(d)(2). The Treasury Regulations permit slight variations on the standard unitrust. One variation allows the trustee to pay out only trust income to the beneficiary if the actual income is less than the stated fixed percentage of assets. Treas Reg § 1.664-3(a)(1)(i)(b)(1). A second variation is a “net income with makeup” (also known as a “NIM-CRUT”) unitrust whereby the trustee pays only trust income during

4 The IRS has provided guidance on how to draft CRUTs and CRATs. The mandatory rules are in Rev Rule 72-395, 1972-2 CB 340 modified by Rev Rule 80-123, 1980-1 CB 205; Rev Rul 82-128, 1982-2 CB 71; Rev Rul 88-81, 1988-2 CB 127; Rev Rul 82-162, 1982-2 CB 117; Rev Rul 92-57, 1992-2 CB123.

Advanced Estate Planning and Administration 2016 2–11 Chapter 2—Charitable Deductions

years when the actual income is less than the fixed percentage but” makes up” the difference in later years if the trust income exceeds the fixed percentage. Treas Reg § 1.664-3(a)(1)(i)(b)(2). There is a third variation often referred to as a “flip Trust” whereby the trust starts out as NIM-CRUT and is funded with assets that are low-yield and not immediately marketable. Once the assets are sold, the NIM-CRUT “flips” to a standard unitrust.

2. Charitable Remainder Annuity Trust (“CRAT”). An annuity trust functions very much like a unitrust except that instead of paying out a fixed percentage of the annual fair market value of the trust, the annuity trust specifies that a fixed dollar amount (at least five percent but not more than 50 percent of the initial net fair market value of transferred property) be paid annually to income beneficiary for life or the trust term. On death of beneficiary (or survivor beneficiary, if more than one), a specified charity gets the remainder. IRC § 664(d)(1).

PRACTICE TIP: Unlike a charitable remainder unitrust, annuity trusts cannot receive additional assets after the initial funding. A donor who would like to fund a remainder trust with a relatively small amount of assets during life and then add to it by will after death must use a unitrust.

3. Income Tax Rules. The remainder trust itself is exempt from income tax (except to the extent that the trust incurs unrelated business taxable income). IRC § 664(c). The income beneficiary is required to treat distributions from a remainder trust in accordance with the following schedule:

a. First, as ordinary income, to the extent that the trust has ordinary income for the current year and any undistributed ordinary income from prior years;

b. Second, as capital gain, to the extent that the trust has capital gain for the current year and any undistributed capital gain from prior years;

c. Third, as other income (e.g., tax-exempt income), to the extent that the trust has other income for the current year and any undistributed other income from prior years;

d. Fourth, as a distribution from corpus. IRC § 664(b).

4. Gift Tax Rules. A remainder trust with the donor as the sole income beneficiary is not subject to gift tax. However, the donor must report the remainder gift to charity (regardless of size because it is a future interest) on a federal gift tax return. IRC § 6019. The donor then takes an offsetting gift tax charitable deduction. Where a donor creates a remainder trust benefiting another person, the donor has made two gifts: one to the beneficiary (the value of the life interest) and one to the charity (the value of the remainder interest). If the life interest is a present interest, it will qualify for annual

Advanced Estate Planning and Administration 2016 2–12 Chapter 2—Charitable Deductions

exclusion. However, to the extent the value of the life interest exceeds the $14,000-per-donee annual exclusion, or if the gift is a future interest, the gift will use up the donor’s gift tax credit. If the donor has no gift tax credit left, gift tax will be due. IRC § 2503(a); Treas Reg §25.2503(b).

PRACTICE TIP: A donor can avoid making a gift to a survivor beneficiary by providing in the inter vivos trust instrument the right (exercisable only by will) to revoke the survivor’s life interest. Should the donor exercise that right, the trust will terminate on the donor’s death, and the remaining amount in the trust will be paid to charity. The donor need not actually exercise the right in the will; merely retaining the right avoids the donor’s making a completed gift to the survivor beneficiary. Rev Rul 79-243, 1979-2 CB 343; Treas Reg § 1.664-3(a)(4) and 25.2511-2(c). Despite the flexibility of this approach, for donors living in a state with a separate estate tax and no gift tax (such as Oregon or Washington), it will be better to make a completed gift and file a gift tax return at the time of funding.

5. Estate Tax Rules. In general, the value of trust assets remaining at the donor’s death is includable in the gross estate of the donor if the donor is a lifetime income beneficiary of the trust. The estate may then deduct the value of the trust assets as charitable contribution, resulting in a wash. IRC § 2036 and 2055(e)(1)(B); Treas Reg § 1.664-4. Where the donor is not a lifetime beneficiary of a trust, the value of the trust assets will not be included in the donor’s gross estate. IRC § 2035(d). If the donor created a two-life remainder trust that benefits another person after the donor’s death, the entire value of the trust is included in the donor’s estate. IRC § 2036. The estate will receive a charitable deduction for the full value of the trust if the other person predeceases the donor. Treas Reg § 20.2031-7. If the other person survives the donor, the value of that person’s interest is subject to estate tax unless the person is a surviving spouse entitled to a marital deduction. IRS § 2032(b)(2); IRC § 2056(b)(8).

PRACTICE TIP: Note that an estate tax marital deduction for spouse’s life interest is allowable only if the spouse is the sole non-charitable beneficiary of the remainder trust. For example, a remainder trust created by a donor’s will providing payments to spouse for life, and then to son for life, would not qualify for an estate tax marital deduction. (The charitable remainder interest would still qualify for the estate tax charitable deduction.)

CAVEAT: Spouses who are non-U.S. citizens do not qualify for the marital deduction. To obtain a marital deduction for assets passing to a non-resident spouse, the assets must pass to a qualified domestic trust (“QDOT”). In general, for a trust to qualify as a QDOT: (1) at least one trustee must be a U.S. citizen or domestic corporation; (2) the executor must make an irrevocable election on the estate tax return to qualify the trust for the marital deduction under the QDOT rules; and (3) the trust must meet Treasury requirements that ensure that IRS can collect estate tax from the QDOT. Treasury Regulations provide that a QDOT

Advanced Estate Planning and Administration 2016 2–13 Chapter 2—Charitable Deductions

may be in the form of a charitable remainder trust, Treas Reg § 20.2056A-2(b)(1), so long as the surviving spouse is the only noncharitable beneficiary and the trust otherwise meets all of the QDOT requirements.

B. Charitable Lead Trusts.

Charitable lead trusts are like inverted remainder trusts. To create a lead trust, a donor must establish a trust that makes payments to a charity for a person’s lifetime or a term of years. At the end of the period, the assets revert back to the donor or other family members. Charitable lead trusts can be used as a lifetime giving vehicle or as a testamentary device. Charitable lead trusts are complex animals, and they may be structured in a variety of different ways: grantor v. non-grantor; unitrust v. annuity trust; qualified v. non-qualified. Charitable lead trusts must be created with care to ensure that the structure chosen meets the needs and expectations of the client.

1. Grantor v. Non-Grantor. If a qualified lead trust is structured as a grantor trust, all of the trust’s income, gains and losses will be recognized on the donor’s individual income tax return each year. The donor receives an income tax deduction equal to the value of the lead interest in the year the trust is formed, but no additional income tax deductions are allowed unless the distributions to charity from the trust exceed the amount required to be distributed. The fact that the donor is obligated to pay income tax on the trust’s earnings during the charitable term may be a positive factor for those donors who are motivated to maximize the amount distributed to family at the termination of the lead trust. Payment of income tax by the donor allows the trust assets to grow tax free. Grantor lead trusts can only be created during lifetime. If a qualified lead trust is structured as a non-grantor lead trust, the donor receives no charitable deduction upon funding. The trust itself would be entitled to a charitable income tax deduction for distributions made to charity during the trust term. Non-grantor lead trusts are used primarily for their transfer tax benefits.

2. Unitrust v. Annuity Trust. The income interest in a charitable lead trust may be structured as a guaranteed annuity payment (charitable lead annuity trust or “CLAT”), or as a fixed percentage of the annual fair market value of trust property (charitable lead unitrust or “CLUT”). The requirements for the CLUT are strict--unlike a charitable remainder trust, there is no “lesser of income or unitrust amount” available for a CLUT. Due to the complexities of the GST exemption allocation rules, only a CLUT should be used when there are skip persons as remainder beneficiaries.

3. 3. Qualified v. Non-Qualified. Qualified lead trusts must meet all of the requirements applicable to qualifying as a CLAT or a CLUT. In addition, the private foundation rules regarding self-dealing, excess business holdings, jeopardy investments and taxable expenditures all apply to qualified lead trusts. A donor who wishes to fund a lead trust with assets that would otherwise violate the private foundation rules may create a non-qualified non-grantor lead trust. With a non-qualified non-grantor lead trust, the

Advanced Estate Planning and Administration 2016 2–14 Chapter 2—Charitable Deductions

grantor avoids tax on the income (paid by the trust), and the trust receives a charitable deduction when income is distributed to charity. The entire gift to the trust will be subject to gift tax because the trust is not a qualified lead trust. However, if the grantor retains the power to designate the charitable lead interest there is no completed gift on funding.

C. Pooled Income Funds.

A pooled income fund is a fund that maintains property for the lifetime benefit of the donor or named beneficiaries and the remainder interest for a qualified charitable organization. The fund is a “group pool” of sorts – all donor assets are commingled. The funds must be administered by the ultimate remainder beneficiary – so usually only larger charitable institutions (e.g., schools and hospitals) offer them. Pooled income funds are also available through community foundations. The advantage of a pooled income fund is that donors can transfer relatively small amounts to the fund and still reap the benefits of an income stream and a current income tax deduction. The income paid to the donor (or designated beneficiary) is based upon the annual rate of return of the fund and is taxed to the donor (or beneficiary) as ordinary income.

D. Charitable Gift Annuities.

1. In General. A donor creates a charitable gift annuity by irrevocably transferring money or property to a qualified organization in return for its promise to pay the donor (or another beneficiary) fixed and guaranteed payments for life. In essence, the transfer is part charitable gift and part purchase of an annuity. The amount of payment is fixed at the outset and never varies. As with a commercial annuity: (1) the older the annuitant at the annuity starting date, the larger the annual payments; (2) when there are two annuitants, the annual payments are smaller than if there is one annuitant; and (3) a portion of each annuity payment is excludable from gross income for the period of the annuitant’s life expectancy. The excludable (tax-free) amount is established at the annuity starting date. The charitable contribution for the annuity is the difference between the amount of money (or the fair market value of long-term securities or real estate transferred) and the value of the annuity. Treas Reg § 1.170A-l(d).

2. Regulation. In addition to being regulated by the Internal Revenue Service, charitable gift annuities are subject to regulation by the Insurance Commission for the State of Oregon. The state imposes registration and reporting requirements upon charities that offer gift annuities.

3. Comparison with Annuity Trusts. The charitable gift annuity differs from the charitable remainder annuity trust in that an annuity trust’s payments are made only as long as the trust has sufficient assets. Gift annuity payments are backed by all of the charity’s assets. The capital gain implications, the way rates are set, and the taxation of the annual payments also differ from the annuity trust.

Advanced Estate Planning and Administration 2016 2–15 Chapter 2—Charitable Deductions

E. Gift of Remainder Interest in Personal Residence or Farm.

1. In General. A donor can obtain income and estate tax benefits by making a charitable gift of a personal residence or farm even though the donor retains the right to life enjoyment. IRC §170(f)(3)(B)(i); IRC §~2522(c)(2) and 2055(e)(2). A life estate may be retained for one or more lives, or an estate may be retained for a term of years. However, this method of deferred giving will only work for a personal residence or farm. The definition of a personal residence includes a vacation home. The gift must be outright – it cannot be in trust. Rev Rul 76-357, 1976-2 CB 285.

2. Charitable Deduction. For the income tax charitable deduction, depreciation and depletion must be taken into account to determine the value of the remainder interest. Those values are discounted at an interest rate that depends on the federal rate in effect at the time of the transfer. For gift and estate tax purposes, depreciation (or depletion) need not be taken into account in valuing the remainder.

3. Capital Gain. Capital gain is generally not taxable on a transfer of appreciated property to charity. However, gain is taxable to a donor who donates property subject to indebtedness, whether or not charity assumes the debt. IRC § 1011(b); Treas Reg § 1.1011-2(a)(3). If a donor bargain-sells a remainder interest in an appreciated personal residence or farm to charity, donor will have gain determined under IRC § 1011(b) and Treas Reg § 1.1011-2.

4. Gift of Remainder Interest with Life Estate Reserved for Beneficiary Other than Donor. A donor who donates a remainder in a personal residence or farm creating a life estate in him or herself and then in another (e.g., a spouse or child) makes two gifts: one to the life beneficiary (the value of the life interest) and one to the charity (the value of its remainder interest). If the life tenant predeceases the donor, the entire amount will be included in the donor’s estate subject to a full charitable deduction. If the life tenant survives the donor, the value of the life tenant’s interest will be subject to estate tax. Of course, if the surviving life tenant is the donor’s spouse, the interest may qualify for the marital deduction.

5. Gift Tax Issues. The remainder interest to charity is a future interest and therefore a donor must file a federal gift tax return and report the value of the remainder as a gift. The donor receives a full gift tax charitable deduction. If the donor gives a life estate to another person (non-spouse) with remainder to charity, he or she must report the value of both gifts. If the life estate is a present interest there will be a $14,000 annual exclusion available. The charitable remainder is a future interest but receives a charitable deduction as an offset. A life estate to a spouse is QTIPable.

Advanced Estate Planning and Administration 2016 2–16 Chapter 2—Charitable Deductions

F. Qualified Conservation Contributions.

1. In General. A qualified conservation contribution (aka “conservation easements”) is a gift of a qualified real property interest to a qualified organization exclusively for conservation purposes. IRC § 170(h). A qualified real property interest is: (1) the entire interest of the donor (other than a qualified mineral interest); (2) a remainder interest; or (3) a restriction, granted in perpetuity, on the use that may be made of the real property. A qualified organization is defined (essentially) as a public charity, governmental unit, and certain supporting organizations.

2. Conservation Purposes. A “conservation purpose” must be: (1) the preservation of land areas for outdoor recreation by, or for the education of, the general public; (2) the protection of a relatively natural habitat of fish, wildlife, plants, or similar ecosystem; (3) the preservation of open space (including farmland and forest land) where that preservation will yield a significant public benefit and is either for the scenic enjoyment of the general public or under a clearly delineated federal, state, or local governmental conservation policy; or (4) the preservation of an historically important land area or a certified historic structure.

3. Deduction Limitations. In general, the regular income tax deduction limitation rules apply to contributions of conservation easements. Special legislation has raised the normal 30 percent AGI limitation for the contribution of capital gain property to 50 percent for the contribution of a qualified conservation easement. IRC § 170(b)(1)(E)(i). There is also a 15-year carryover (in lieu of the usual 5-year carryover limitation). Finally, qualified farmers and ranchers have additional tax incentives for qualified contributions (e.g., deductions of up to 100 percent of AGI). IRC § 170(b)(2)(B)(i).

III. FOUNDATIONS

A. Private Foundations.

1. Purpose. Private foundations are often established by an individual donor to facilitate and manage the donor’s (or the donor’s family’s) charitable contributions. A private foundation is usually structured as a charitable corporation or charitable trust. Family members often serve as foundation directors or trustees and actively participate in investment management and grant-making activities.

2. Definition Under the Tax Code. Private foundations are defined by exception. By definition, every Section 501(c)(3) organization is a private foundation unless it fits into one of many specific exceptions that allow the organization to be treated as a non-private foundation (often referred to as a “public charity”). These exceptions include statutory charities such as schools, churches, hospitals, governmental units, and certain other organizations. It also includes organizations that demonstrate broad financial support from the general public.

Advanced Estate Planning and Administration 2016 2–17 Chapter 2—Charitable Deductions

3. Operational Restrictions. The Treasury Regulation imposes significant restrictions on the operations of a private foundation. These restrictions are aimed at curtailing the abuse of private foundations. Following is a list of the most significant restrictions:

a. Self-Dealing. Certain acts of self-dealing are subject to excise taxes. Self-dealing is a direct or indirect sale or exchange between a private foundation and a “disqualified person.” Disqualified persons include substantial contributors to the foundation, foundation managers, persons related to a substantial contributor, and entities in which disqualified persons have a substantial interest. Self-dealing includes loans, furnishing goods and services, providing facilities, and payments of excess compensation. IRC § 4941.

b. Excess Business Holdings. Excise taxes are imposed on “excess business holdings” of a private foundation. The prohibition states that the combined holdings of a private foundation and all disqualified persons are limited to 20 percent of the voting stock of any corporation not substantially related to the exempt purposes of the private foundation. The excise tax is 50 percent of the value of the “excess business holdings” followed by a tax of 200 percent of the value of the excess business holdings if the violation is not cured within a certain time. IRC §4943.

c. Minimum Distribution Rules. A private foundation, in general, must distribute an annual amount equal to 5 percent or more of the value of its investment assets. There is a substantial excise tax on the failure to distribute the required amounts. IRC § 4942.

d. Tax on Investment Income. The net investment income of a private foundation is subject to a flat two percent excise tax. IRC § 4940.

e. Jeopardy Investments. There is an excise tax on certain “jeopardy” investments deemed to jeopardize the charitable purpose of a private foundation. The Treasury Regulations do not list particular types of investments as jeopardy investments. However, the regulations list transactions that will be closely scrutinized such as trading on margins, trading in commodity futures, purchasing puts, calls, or straddles, purchasing warrants, and selling short. IRC § 4944.

f. Taxable Expenditure Rules. There is an excise tax on “taxable expenditures” by a private foundation. Taxable expenditures include amounts paid: (1) to influence legislation or elections; (2) as a grant to an individual for travel or study (unless certain other requirements are met); (3) as a grant to any organization other than a public charity (in general); or (4) for any purpose other than a “charitable” purpose. IRC § 4945.

Advanced Estate Planning and Administration 2016 2–18 Chapter 2—Charitable Deductions

4. Restrictions on Contributions. As discussed above in section I.A.9., deductions for contributions to private foundations are limited to 30 percent of a donor’s adjusted gross income. Deductions for gifts of long-term capital gain property are limited to 20 percent of a donor’s adjusted gross income. In general, contributions of capital gain property are limited to basis, with the exception of publicly traded securities, which are deductible at full fair market value.

B. Community Foundations and Advised Funds.

1. Community Foundations. Community foundations are Section 501(c)(3) organizations that qualify as “public charities” under the public support test. As public charities, community foundations are not subject to most of the operating restrictions or restrictions on contributions applicable to ordinary private foundations. Community foundations offer donors many significant advantages over a private foundation. In addition to fewer restrictions on donations, community foundations offer efficiencies through consolidated investment management and lower administrative costs. Although donors sacrifice some degree of control by using a community foundation instead of a private foundation, there are several ways that a donor can remain actively involved in the administration of donated funds.

2. How Community Foundations Operate. A community foundation is essentially a pool or group of grant-making funds. Most community foundations (such as The Oregon Community Foundation) offer a variety of options for giving. Donors can make unrestricted contributions giving the community foundation complete discretion as to how to expend the charitable donation. Community foundations also offer designated funds and field of interest funds that benefit specific charities or causes. One of the most popular giving vehicles offered by a community foundation is the donor-advised fund.

3. Advised Funds. A donor advised fund allows a donor to contribute assets to a fund that is managed by a sponsoring charity and receive an immediate income tax deduction for the contribution. The donor can then direct distributions to charities from the fund over time. With an advised fund, the donor (or a committee designated by the donor, such as the donor’s family) advises the sponsoring charity on the actual charitable distributions to be made from the advised fund. The sponsoring charity will make its best effort to honor a donor’s wishes for an advised fund. However, because the charity has legal control over all funds (a gift must be complete in order to qualify as a charitable contribution), the charity retains the right to make a final decision regarding distributions from an advised fund. The use of advised funds has spread to commercial brokerage firms who have established charities to house donor-advised funds created by customers (e.g., Fidelity Charitable Gift Fund). Some sponsoring charities (e.g., large schools and hospitals) offer donor advised funds with the proviso that a certain percentage of fund distributions be made to the sponsoring charity.

Advanced Estate Planning and Administration 2016 2–19 Chapter 2—Charitable Deductions

Advised funds have evolved through IRS rulings and case law; there was never a statutory definition for an advised fund until the Pension Protection Act of 2006. A donor advised fund is now defined as a fund that is:

a. Separately identified with reference to the contribution of a donor or donors (e.g., the Serrurier Family Fund);

b. Owned and controlled by a sponsoring organization (e.g., The Oregon Community Foundation);

c. Operated such that the donor has the privilege of providing advice with respect to the fund’s investments or distributions.

The Pension Protection Act added an excess benefits tax on advised funds similar to the private foundation self-dealing tax discussed in Section III.A.3 above. The tax is automatically imposed on any grant, loan, compensation or other payment to the donor or other disqualified person (e.g., family member).

C. Supporting Organizations.

Supporting organizations are charitable organizations described in Section 509(a)(3) of the Code. A supporting organization is typically funded and can be operated much like a private foundation, but is treated for tax purposes as a public charity rather than a private foundation. Therefore, supporting organizations can be very attractive to donors looking for the maximum tax deduction for a contribution. A supporting organization receives special treatment under the tax code because, by definition, it must be structured to further the charitable goals of one or more public charities.

Example: If a client has appreciated real estate with a fair market value of $800,000 and a basis of $200,000, she can deduct $200,000 if she gives the property to her private foundation, or she could deduct $800,000 if she gives it to a supporting organization. In addition, her deduction for a gift to her supporting organization would be capped each year at 30 percent of her Adjusted Gross Income (“AGI”) whereas the deduction for a gift to her private foundation would be capped each year at 20 percent of her AGI. (A cash gift would be 50 percent v. 30 percent AGI cap.)

1. The Four-Part Test.

a. Relationship Test. The supporting organization must be operated, supervised, or controlled, or operated in connection with, one or more specified public charities. This relationship test may be satisfied by one of three specific structures – also known as “the types” – Type I; Type II; Type III.

b. Organizational Test. The supporting organization must be organized exclusively for the benefit of, to perform the functions of, or carry out the

Advanced Estate Planning and Administration 2016 2–20 Chapter 2—Charitable Deductions

purposes of one or more specified public charities. The supporting organization can be created as a nonprofit corporation or charitable trust. The organizational documents must meet all of the requirements under the treasury regulations under Section 501(c)(3) and 509(a). There are additional requirements for the Type III supporting organization. A Type III must identify by name the charities it supports, and its organizational documents may authorize the substitution of a charity only if the substitution is conditioned on an event that is beyond the control of the supporting organization.

c. Operational Test. The supporting organization must be operated exclusively for the benefit of, to perform the functions of, or carry out the purposes of specified public charities. Treas Regs § 1.509(a)-5(b)-(d). The supporting organization can meet the operational test by (1) paying income directly to the designated charity; (2) directly carrying on activities that benefit the designated charities; (3) making direct expenditures for the benefit of individual or charities served by the supported organization; or (4) fundraising to benefit the supported charities.

d. Control Test. The supporting organization must not be controlled (directly or indirectly) by disqualified persons. Under the control test, “disqualified persons” may not, by themselves, have the power to require a supporting organization to perform acts that affect its operations. In the context of a supporting organization, the following are treated as “disqualified persons”:

(i) Substantial contributors (contributors of $5,000 or 2 percent of the total gifts received by the supporting organization);

(ii) Persons with voting or beneficial interests that exceed 20 percent in an entity that is a substantial contributor;

(iii) Ancestors, children, grandchildren or great-grandchildren; and

(iv) Spouses of any of the above.

A supporting organization can flunk the control test if a disqualified person exercises indirect control – based on a facts and circumstances test. For example, if a disqualified person can manipulate the structure of the board of the supporting organization through other connections – the IRS can find indirect control.

2. Types of Supporting Organizations.

As stated above, Section 509(a)(3)(B) of the Code allows for the relationship test to be satisfied in one of three ways:

Advanced Estate Planning and Administration 2016 2–21 Chapter 2—Charitable Deductions

a. Type I. “Operated, supervised or controlled by” one or more public charities. With this structure, a majority of directors (or trustees) are appointed by the supported organization. The relationship between the two entities is analogous to a corporate parent and its subsidiary. Treas Reg § 1.509(a)-4(g).

b. Type II. “Supervised or controlled in connection with” one or more public charities. This structure requires common management between the supporting organization and the public charity it is supporting. The relationship is analogous to a “brother-sister” corporate relationship. Treas Reg § 1.509(a)-4(h).

c. Type III. “Operated in connection with” one or more public charities. This form requires the least connection with the public charity. The supporting organization need not be formally tied to the supported organization. Instead, the supporting organization must be “responsive” to the charity, and must function such that it is an “integral part” of the charity. Treas Reg § 1.509(a)-4(i).5

3. Operation.

Supporting organizations have all of the tax benefits associated with giving to a public charity yet provide a greater degree of control over investments and charitable distributions. In particular, supporting organizations avoid most of the administration requirements and regulations imposed the rules that govern private foundations. The catch is that a supporting organization must be structured with care, must support one or more public charities, and must be independent of the donor or donor’s family.

a. Designating Charities. A supporting organization must designate the public charities it will support. A donor can preserve flexibility by designating a community foundation as a public charity.

b. Corporation or Trust. A supporting organization can be structured as a trust or corporation. Individual circumstances will dictate which model is best, but generally a corporation may provide greater continuity and predictability, and better liability protection. Trusts offer more opportunity for custom drafting, and if tax is a factor, will generally provide more favorable capital gain tax rates (but a higher tax on ordinary income).

c. Compliance. Supporting organizations must file annual tax returns (Form 990), maintain compliance with state law (regular meetings, reporting requirements, etc.), manage its investments, and make distributions in support of its public charity or charities (although a private foundation, no minimum payout

5 There are specific “responsiveness” and “integral part” tests for the Type III supporting organization. See Treas Reg § 1.509(a)-4(i)(2)-(4). Donors are often attracted to the Type III supporting organization because it requires the least supervision by the supported charity or charities. However, the Type III is subject to much stricture scrutiny by the IRS.

Advanced Estate Planning and Administration 2016 2–22 Chapter 2—Charitable Deductions

is required). In addition, the Pension Protection Act of 2006 assesses a penalty tax on supporting organizations that are similar to the self-dealing tax discussed in Section III.A.3 above. The tax is imposed on any grant, loan, compensation payment or similar distribution to a substantial contributor (or the family of a substantial contributor) to the supporting organization. The law also imposes the private foundation excess business holdings prohibition on Type III supporting organizations.

Advanced Estate Planning and Administration 2016 2–23 Chapter 2—Charitable Deductions

Advanced Estate Planning and Administration 2016 2–24 Chapter 3 Anticipating and Conducting Estate and Gift Tax Audits: Confessions of a Former IRS Attorney

Justin Alt Davis Wright Tremaine LLP Seattle, Washington

Contents I. Introduction ...... 3–1 II. Classification of Estate and Gift axT Returns by the IRS 3–1 A. What Is Classification? ...... 3–1 B. What Is the IRS Looking for at Classification? ...... 3–1 C. The Sausage Making Described ...... 3–1 III. Preparing Transfer Tax Returns to Minimize Audit Risks and Maximize Tax Efficiencies 3–2 A. How Much to Disclose? 3–2 B. Formatting the Return 3–4 C. Accepting the Inevitable ...... 3–4 IV. Hot-Button Issues or Emerging Issues 3–5 A. Net-Net Gifts 3–5 B. Split Dollar Life Insurance ...... 3–5 C. Promissory Note Schemes ...... 3–6 D. Valuation Discounts ...... 3–7 E. Cash GRATs and IDGTs 3–7 V. Transfer Tax Audits ...... 3–7 A. Overview ...... 3–7 B. Strategies for Effective Resolution ...... 3–8 C. Unagreed Cases and IRS Appeals ...... 3–8 Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

Advanced Estate Planning and Administration 2016 3–ii Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

I. INTRODUCTION

These materials focus on strategies aimed at minimizing federal estate and gift taxes while representing taxpayers before the Internal Revenue Service (IRS) in transfer tax audits. State transfer taxes will not be discussed.

II. CLASSIFICATION OF ESTATE AND GIFT TAX RETURNS BY THE IRS

A. What is Classification?1

Classification is the process by which the IRS determines which estate and gift tax returns, Forms 706 and 709, respectively, to audit. Every Form 706 and 709 is reviewed at least once by an IRS Estate Tax Attorney (ETA). This contrasts sharply with how the IRS processes most income tax returns. A flesh and blood person is unlikely to ever look at a 1040 filed with the IRS (and even less likely to review a 1041). But this should be repeated – every transfer tax return is analyzed at least once by not only a living breathing person, but one with a law degree who specializes in the estate and gift taxes.

B. What is the IRS Looking for at Classification?

Generally, they’re looking for “large, unusual or questionable” items reported on transfer tax returns, or “LUQ’s” as they like to call them. There is a memorandum issued before classification that outlines what issues the classifying attorneys should be on the lookout for. There are general guidelines in terms of discount amounts and other legal issues the IRS determines to be relevant or abusive. These are discussed below in section IV of the materials. They are primarily looking for returns that have a possibility of generating tax. So a 709 that reports total gifts of $100,000 or so (and no prior gifts) is unlikely to be audited, even if the subject gift is highly discounted family limited partnership interests. Or in the estate tax context, if it is a first-to-die spouse and there is no tax due, the IRS is unlikely to audit the return.2

C. The Sausage Making Described:

Classification takes place in a warehouse in Florence, Kentucky. ETA’s from all over the country are assigned two-week details where they do nothing but review either 706’s or 709’s. In theory, these are voluntary assignments, but in reality, ETA’s are voluntold to go to classification. 706’s and 709’s are reviewed separately; they have 706 classification and 709 classification details. In either event, there is a seemingly endless pile of returns to get through. It’s daunting. Some might even say terrifying. For a 709, the ETA has roughly two minutes per return. This includes reviewing any attachment such as a trust agreement or appraisal. In those two minutes, they have to make a decision whether to accept the return as filed or send it to “the wall” for further review. ETA’s have about five to ten minutes to do the same for 706’s. It’s neither a marathon nor a sprint. It’s a sprint that lasts eight hours per day for two straight weeks.

1 If you ask an IRS Estate Tax Attorney, they might tell you that it is actually the most vulgar C-word in the English language. 2 This presents a planning opportunity if you are not using portability and making a QTIP election on the exemption trust. You can fund a true exemption trust with the discounted assets so long as you comply with the true worth or fairly representative funding. This doesn’t permit you to “stuff” the exemption trust and “short” the marital trust. But it does allow your clients to minimize the audit risks associated with transferring closely held business interests.

Advanced Estate Planning and Administration 2016 3–1 Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

If the ETA decides the return should not be accepted as filed, it gets placed in a stack of returns organized geographically. This is referred to as “the wall.” If your return finds its way to the wall, all hope is not lost. The IRS employs a fulltime ETA to do nothing but review returns on the wall and only send the best ones out to be audited in “the field.” This person’s actual job title is, “the Gatekeeper3”. The Gatekeeper has more time to analyze the returns, but the Gatekeeper does not have the ability to review the returns that were accepted as filed to determine if anything was missed. Most ETA’s, therefore, err on the side of classifying too many returns rather than too few. The theory is that the Gatekeeper will pull the returns off the wall that don’t actually need to be audited in the field.

That said, a lot of returns slip through the cracks. ETA’s simply don’t have enough time to review each return thoroughly. And a lot gets missed. A lot of returns also get classified that should have been accepted as filed. Many times, this is due to sloppy preparation or intentionally vague statements. If the ETA can’t tell what’s going on from their first two to ten minute review, that return is getting put on the wall. The Gatekeeper in practice pulls very few returns off the wall. And so, if your return doesn’t have a bona fide issue, but it was confusing, your client just bought themselves an audit.

Each return that is selected for audit is put in a special folder. The classifying attorney writes the “classified issue(s)” on the folder. Then it’s sent to a regional IRS office for an ETA to audit in the field. Once it’s in the field, the ETA assigned the case is not confined to work only the classified issues. Often, the classified issues aren’t worth working. However, there are almost always other issues to work. And even if there aren’t, the ETA is practically required to work the case anyway. They used to be able to decide not to work a case by simply stamping it “surveyed after assignment.” This allowed them to close cases without actually doing any work on them. They can still survey cases, but the stamp is gone.4 Now they have to fill out an insane amount of paperwork to survey a case. And the reality is that it is less work to actually send out an audit letter than it is to survey the case. The upshot is that cases that have no legitimate audit issue end up being audited. This is absurd. And if it isn’t completely avoidable, you can at least minimize the risk of this happening to your clients by carefully and thoughtfully preparing your transfer tax returns.

III. PREPARING TRANSFER TAX RETURNS TO MINIMIZE AUDIT RISKS AND MAXIMIZE TAX-EFFICIENCIES

A. How Much to Disclose?

My personal preference is to err on the side of disclosing too much, particularly for gift tax returns. Recall that Treasury Regulation section 301.6501(c)-1(f)(1) provides an exception to the general statute of limitations on assessment. Gifts not adequately disclosed on the return may be assessed at any time. There is a safe-harbor in section 301.6501(c)-1(f)(2). It’s not difficult to comply with the safe-harbor. There are five separate requirements contained in paragraphs (i) through (iv). The safe harbor is met if you provide:

3 The last Gatekeeper serving while I was with the IRS did not know the Keymaster. I asked. 4 Rumor has it, the stamp was being abused.

Advanced Estate Planning and Administration 2016 3–2 Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

(i) A description of the transferred property and any consideration received by the transferor;

(ii) The identity of, and relationship between, the transferor and each transferee;

(iii) If the property is transferred in trust, the trust's tax identification number and a brief description of the terms of the trust, or in lieu of a brief description of the trust terms, a copy of the trust instrument;

(iv) Except as provided in§ 301.6501-1(f)(3), a detailed description of the method used to determine the fair market value of property transferred, including any financial data (for example, balance sheets, etc. with explanations of any adjustments) that were utilized in determining the value of the interest, any restrictions on the transferred property that were considered in determining the fair market value of the property, and a description of any discounts, such as discounts for blockage, minority or fractional interests, and lack of marketability, claimed in valuing the property. In the case of a transfer of an interest that is actively traded on an established exchange, such as the New York Stock Exchange, the American Stock Exchange, the NASDAQ National Market, or a regional exchange in which quotations are published on a daily basis, including recognized foreign exchanges, recitation of the exchange where the interest is listed, the CUSIP number of the security, and the mean between the highest and lowest quoted selling prices on the applicable valuation date will satisfy all of the requirements of this paragraph (f)(2)(iv). In the case of the transfer of an interest in an entity (for example, a corporation or partnership) that is not actively traded, a description must be provided of any discount claimed in valuing the interests in the entity or any assets owned by such entity. In addition, if the value of the entity or of the interests in the entity is properly determined based on the net value of the assets held by the entity, a statement must be provided regarding the fair market value of 100 percent of the entity (determined without regard to any discounts in valuing the entity or any assets owned by the entity), the pro rata portion of the entity subject to the transfer, and the fair market value of the transferred interest as reported on the return. If 100 percent of the value of the entity is not disclosed, the taxpayer bears the burden of demonstrating that the fair market value of the entity is properly determined by a method other than a method based on the net value of the assets held by the entity. If the entity that is the subject of the transfer owns an interest in another non-actively traded entity (either directly or through ownership of an entity), the information required in this paragraph (f)(2)(iv) must be provided for each entity if the information is relevant and material in determining the value of the interest; and

(v) A statement describing any position taken that is contrary to any proposed, temporary or final Treasury regulations or revenue rulings published at the time of the transfer (see§ 601.601(d)(2) of this chapter).

In lieu of providing the detailed valuation description described in paragraph (iv) above, a taxpayer can submit an appraisal if the appraisal contains the information required by Treasury

Advanced Estate Planning and Administration 2016 3–3 Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

Regulation section 301.6501-1(f)(3). Sometimes it isn’t cost-efficient to pay for an appraisal. Or often we obtain one appraisal for a holding company in one year, and update the net asset value in subsequent years. Query whether this meets safe-harbor. But also, does it matter? This is just a safe-harbor. It doesn’t follow that if you fail to meet the safe-harbor, that your gift was not adequately disclosed. The IRS would have a very difficult time arguing for an unlimited statute on the basis that the taxpayer applied the discounts from an old appraisal to the date of gift balance sheet.

There is no adequate disclosure rule for estate tax returns. Rather, the exception to the general statute for assessment can be found in Internal Revenue Code (IRC) section 6501(e)(2) pertaining to substantial omissions. This rule applies to both estate and gift tax returns. An omission is “substantial” if the omitted item exceeds 25% of the assets shown on the return. Rather than an unlimited statute, the statute for assessment is expanded to six years from the original three year statute. The six year statute applies to the return in general, not just the omitted items.

B. Formatting the Return:

For either estate or gift tax returns, provide the information as concisely as you can. Don’t try to hide the ball. Be proud of your discounts. The IRS is going to find them, even if you try to hide them in a price-to-net-asset-value format. Make it easy for the IRS to find the relevant information. If the classifying attorney feels like you’re being deceptive, that’s almost a guarantee that you’ll get audited. They don’t need to find what it is you’re trying to hide. They just need to find something that doesn’t make sense to them.

Your return should be organized. Your exhibits should be easy to identify. I always found it easier to read a return if all the exhibits were tabbed behind the return itself. That way, you don’t have a 200 page appraisal separating Schedule F from Schedule G of the 706. On the 706, it’s also probably helpful to briefly describe the valuation method on the face of the return itself, calling out any discounts and their amounts. This just makes it easier for the IRS to quickly analyze and it probably makes them feel as if you’re trustworthy. And truth be told, they will probably just have a general positive association with reviewing that return, and that may be the difference between them deciding to audit or not.

C. Accepting the Inevitable:

Sometimes the facts are going to drive the decision to audit, and it’s inevitable. There’s nothing you can do if your client’s estate was $100,000,000 and a lot of that was tied up in closely held business interests. You’re getting audited. And there’s almost nothing you can do to prevent it.5 Likewise, if your return contains an issue that the IRS is actively developing to try to shape the case law6, you’re going to get audited. Sorry, but sometimes there’s nothing you can do.

5 Except in cases where the estate is passing to the surviving spouse or to charity. Then the IRS doesn’t really care. 6 See section IV of these materials.

Advanced Estate Planning and Administration 2016 3–4 Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

IV. HOT-BUTTON ISSUES OR EMERGINING ISSUES

A. Net-Net Gifts

In a traditional net gift, the donee assumes the gift tax liability arising in connection with the gift. But if the donor dies within three years of making the gift, a taxable gift also gives rise to a contingent estate tax liability under IRC Section 2035(b), which adds back to the donor’s gross estate any gift tax paid. With a “net-net gift, the donee assumes not only the gift tax liability but also this contingent estate tax liability. The U.S. Tax Court initially rejected this approach in McCord v. CIR, 120 T.C. 358. However, the Fifth Circuit reversed this determination, holding that the contingent estate tax liability could reduce the gross value of the gift. McCord v. CIR, 461 F.3d 614. The IRS challenged another taxpayer in the Tax Court (Steinberg v. CIR). They lost their summary judgment motion in 2013. Steinberg v. CIR, 141 T.C 8. And in 2015, the IRS lost the trial, and the Tax Court permitted the net-net gift reduction. Steinberg v. CIR, 145 T.C 7. Despite their loss in Steinberg, the IRS still views this as abusive, and is actively looking to classify returns in which this issue is present.

B. Split Dollar Life Insurance

This is the family limited partnership (FLP) of yesteryear. And that’s not to say that the IRS doesn’t still like to challenge FLP’s. They do. But this is their new battle ground. They view this as really abusive. The basics of this strategy are described by the IRS in the following terms:

Very wealthy parent uses $8 million to purchase a life insurance policy insuring the lives of two of his three children ($4 million each). The children are in their mid to late 30s. The split dollar arrangement requires the children to pay parent back the cost of the policy when the policy matures (at the death of the children). The policies are placed in a Trust and parent dies 11 days later. On the estate tax return, the value of the return-on- investment is present valued. The result is an inclusion in parent's estate of approximately $350,000 for the two policies. The estate does not acknowledge that there was a gift.

The IRS issued final regulations in September 2003 that govern all split-dollar life insurance arrangements entered into or materially modified after September 17, 2003 (final regulations). The final regulations define a split-dollar life insurance arrangement as an arrangement between an owner and a nonowner of a life insurance contract in which: (i) either party to the arrangement pays, directly or indirectly, all or a portion of the premiums on the life insurance contract; and (ii) the party paying for the premiums is entitled to recover all or any portion of those premiums, and such recovery is to be made from, or is secured by, the proceeds of the life insurance contract. Treas. Reg. 1.61-22(b)(1). The final regulations provide two mutually exclusive regimes for taxing split-dollar life insurance arrangements entered into (or materially modified) after September 17, 2003, either the economic benefit regime or the loan regime. Id. subpara. (3)(i); see Our Country Home Enters., Inc. v. Commissioner, 145 T.C. __, __ (slip op. at 29) (July 13, 2015).

The final regulations include a special ownership rule that provides that if the only economic benefit provided under the split-dollar life insurance arrangement to the donee is

Advanced Estate Planning and Administration 2016 3–5 Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

current life insurance protection, then the donor will be the deemed owner of the life insurance contract, irrespective of actual policy ownership, and the economic benefit regime will apply. Morrissette v. CIR, 146, T.C. 11, citing, Treas. Reg. 1.61-22(c)(1)(ii)(A)(2).

In April of 2016, the Tax Court sided with the taxpayer and determined that the payment of life insurance premiums in this type of situation was not a gift in its entirety. Rather, it was governed by the economic benefit regime under Treas. Reg. section 1.61-22 and was therefore reduced such that only the net economic benefit was taxable as a gift. Morrissette v. CIR, 146, T.C. 11. The agreement in Morrissette contained the following language:

“WHEREAS, the parties intend that this Agreement be taxed under the economic benefit regime of the Split-Dollar Final Regulations, and that the only economic benefit provided to the [Dynasty] Trust[s] under this arrangement is current life insurance protection.”

The Tax Court very carefully analyzed whether the Dynasty Trusts in Morrissette received any additional economic benefit. They concluded that they only received life insurance protection and therefore allowed the gift to be reduced under the economic benefit regime in the Treasury Regulations.

This is NOT a blanket approval by the Tax Court of the strategy described above. And the IRS is still pursuing this issue to develop through case law. This is an instance where the IRS probably chose the absolute worst case for them to challenge. (i.e., one that was least abusive). I’ve been told that they are not backing down from this issue. And moreover, the Morrissette case only dealt with whether the premiums paid by the decedent were gifts, or rather the appropriate amount of the gifts. It did not deal with any other issues or challenges the IRS might raise in the estate tax context with regard to the inclusion of the receivable by the parent’s estate where the child is the insured and still living on parent’s death.

C. Promissory Note Schemes

The basic strategy that the IRS perceives as an abuse is as follows: Parent loans Child money at AFR for 15 year term. AFR is only 3.8% at the time of the loan. Parent dies and includes the value of the note in his or her estate. They discount the note from its face value to account for insufficient interest. That is, no commercial lender would enter into a loan with Child at 3.8% interest. So, the note needs to be discounted using market interest rates as the differential. The IRS’s official position is that section 7872(i)(2) is operative, despite the lack of guidance from the Treasury through regulations. That code section generally provides that the Treasury has authority to adopt regulations to ensure that gift loans that are term loans are treated the same in the estate as they were for gift tax purposes. In other words, don’t tell the IRS that this loan was not a below market gift loan for gift and income tax purposes when it was made, and then whipsaw them at the death of the lender by taking the position that the interest is inadequate to cover the risks of the loan and therefore it should be discounted from face value. Recall that Treas. Reg. section 20.2031-4 sets out the presumptive rule that a note is valued at unpaid principal plus accrued interest as of date of death. And it is up to the executor to affirmatively prove that a lower value is warranted. Specifically, the regulation provides: “If not returned at face value, plus accrued interest, satisfactory evidence must be submitted that the note is worth less than the unpaid amount (because of the interest rate, date of maturity, or other

Advanced Estate Planning and Administration 2016 3–6 Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

cause), or that the note is uncollectible, either in whole or in part (by reason of the insolvency of the party or parties liable, or for other cause), and that any property pledged or mortgaged as security is insufficient to satisfy the obligation.” This gives the executor a foothold to argue about a discount for insufficient interest. This coupled with the fact that there are no regulations under 7872(i)(2) makes this argument appealing for some taxpayers. The law isn’t settled in this area, but the IRS perceives this as an abuse.

D. Valuation Discounts

This is always going to be an issue. And what the IRS considers “excessive” fluctuates over time. Generally, a combined discount for lack of marketability or control below 40% is probably safe for an operating company. A combined discount for a holding company of around 35% is also probably safe. And a 25% fractional interest discount is also probably safe. One massive caveat to this: if your return is otherwise being audited for other issues, discounts in this range will almost certainly be challenged.

E. Cash GRATs and IDGTs

There is no law on this but it’s simply something to be aware of. The IRS had a special classification project where they were flagging and monitoring all gift tax returns where taxpayers reported gifts of cash to GRATs and IDGTs. The IRS knows the game you’re playing here, and they don’t like it. But they don’t really know what to do about it either. What’s going on? Donor funds a GRAT or IDGT with cash (or marketable securities). Then at some later date, they exercise their substitution power (grantor trust power under section 675(4)(C)) and exchange the cash for highly discounted closely held business interests. This is not a gift, and it’s not a sale either. The IRS is never informed of this substitution of assets. Like I said, they know the game you’re playing. They just don’t know what exactly to do about it. Presumably, if they catch you at it, they could take the position that the value was wrong and maybe there was an additional contribution to the GRAT. This could be very problematic. Less problematic for the IDGT as this would just be an additional gift.

V. TRANSFER TAX AUDITS

A. Overview

The first sign your client is under audit will be a very long letter from the IRS asking for, in most cases, an obscene amount of documents and information. There are basically two types of audits, limited scope audits (or LSA’s) and full blown examinations. In an LSA, the IRS is only supposed to focus on the classified issue. A regular exam can be expanded to cover any other issue the ETA wants to pursue. I always ask whether the case is an LSA and whether they have expanded the scope. It’s not that I think they’d be bound to the limited scope if they had already expanded it, but it lets them know that I’m in the know. You know?

There are basically two substantive types of audits – valuation cases or questions of law. Valuation cases can also be divided into the type of asset being valued. Generally, there are valuation disputes over discounts or operating companies. The IRS seldom challenges undiscounted real estate values, unless there was something egregious or a very obvious mistake.

Advanced Estate Planning and Administration 2016 3–7 Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

B. Strategies for Effective Resolution

I generally immerse myself in the case entirely when I’m working a big audit. I know that the ETA can spend virtually unlimited time on the case, and I need to be able to do the same (although I am more constrained because nobody loves paying large legal fees). That said, the results speak for themselves, and my clients are typically very, very happy with the results obtained. I spend a lot of time pouring over every exhibit in the return, reading and re-reading them, the way the ETA is doing. Some cases, you should be able to identify immediately as the type of case where sinking a lot of time into it will not be productive. I’ll never do this in a case where I am just going to be negotiating a discount on a FLP.

A lot of the strategy depends on the type of case you’re working. Many cases these days are valuation cases. So let’s start there. FLP’s are easy to deal with. There really is no point in getting the estate’s appraiser involved or really even paying too much attention to the IRS’s engineering report. The issue on a FLP is going to be the combined discount for lack of marketability and lack of control. You’ve probably come in around the 40% mark, and you have a really strong appraisal supporting this with lots of fancy charts. The IRS is probably going to come in around 25%. They’re report is typically going to be a “review appraisal.” It’s not a full- blown appraisal. It’s a review of the taxpayer’s appraisal. They make minor adjustments to that report. It’s not usually a good strategy to argue that the IRS’s report is somehow worth less than the taxpayer’s appraisal. However, if you find mistakes in the IRS’s report, use them

If you approach a FLP discount case with an understanding that the number is going to move a little bit, it makes dealing with the IRS a lot easier. There is no exact discount for any company, and there is always room to argue. It’s generally not productive to get into lengthy substantive arguments with the IRS attorney and engineers. Nobody is going to “win” the argument, because there is usually support for both sides. Similar remarks apply to valuation cases dealing with fractional interest discounts. The IRS usually tries to argue for 15% but they’re willing to settle for much higher discounts.

Operating companies are much more difficult, and the IRS will almost certainly engage an engineer. You should understand your appraisal enough to speak intelligently about it. Sorry, but you’re going to have to understand discounted cash flow analyses and beta adjustments. The IRS attorney understands these, and you need to as well.

In most legal disputes, there is a right answer and a wrong answer. Your job is convincing the IRS that they’re wrong. Sometimes this is a lost cause. But knowing your various options is critical here. You can ask for a manager’s conference with the ETA’s supervisor if you disagree with any determination they’ve made. You can also ask for “fast track settlement” with an appeals officer before the case is closed as an unagreed case. But if you still don’t get the result you’re looking for, you move on to an Appeals conference.

C. Unagreed Cases and IRS Appeals

If your case does not get resolved at the exam level, you have one last stop before Tax Court (or district court if you choose to pay the deficiency): an appeals conference. Your first job is to write a formal written protest to the IRS’s 90 day letter and deficiency notice. The ETA is

Advanced Estate Planning and Administration 2016 3–8 Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

actually given the opportunity to provide a rebuttal to the taxpayer’s protest letter and this is forwarded to the appeals officer.

Appeals officers consider hazards of litigation, whereas an ETA is prohibited from doing so. Appeals officers are notorious for “splitting the baby”. Further, if the ETA did not obtain an IRS engineering report to support their valuation adjustment, the Appeals officer usually sides with the taxpayer. That’s why there is absolutely no incentive to resolve a case with an ETA where they have offered no engineering report in support of their position.

Appeals conferences typically take place over the phone, and it’s not terribly different from what was happening with the ETA. You’ll often go back and forth trading written materials, and you will negotiate a settlement. Appeals officers are generally more generous in settlement terms. So, if you don’t like what the ETA has offered, go forth to Appeals.

If the Appeals conference still doesn’t produce the result you were hoping for, your next step is to either pay the deficiency and file a claim for refund with the relevant district court, or file a petition in the Tax Court without paying the deficiency first. I’m not a litigator, so this is where I engage a litigation partner. It is also a natural stopping point for this materials and this discussion.

Advanced Estate Planning and Administration 2016 3–9 Chapter 3—Anticipating and Conducting Estate and Gift Tax Audits

Advanced Estate Planning and Administration 2016 3–10 Chapter 4 Firearms in Estate Administration

Brian M. Thompson Law Office of Brian M. Thompson Eugene, Oregon

Contents Presentation Slides 4–1 ATF Most Frequently Asked Firearms Questions and Answers ...... 4–27 ATF Form 4473 (5300.9) Part I, Firearms Transaction Record—Over-the-Counter ...... 4–35 ATF Handbook Chapter 2, What Are “Firearms” Under the NFA? ...... 4–41 ATF Handbook Chapter 9, Transfers of NFA Firearms ...... 4–59 27 CFR Part 479, Machineguns, Destructive Devices and Certain Other Firearms; Background Checks for Responsible Persons of a Trust or Legal Entity with Respect to Making or Transferring a Firearm—Summary of Final Rule 4–67 United States of America v. Enrique Marquez, Jr., Excerpt from Criminal Complaint 4–69 ATF Ruling 2015-1, Manufacturing and Gunsmithing 4–71 California Centerfire, Semi-Auto Rifle Identification ...... 4–77 Chapter 4—Firearms in Estate Administration

Advanced Estate Planning and Administration 2016 4–ii 6/2/2016

Chapter 4—Firearms in Estate Administration

Firearms in Estate Administration

Brian M. Thompson June 10, 2016

Martial Arts Background

• Currently training in the martial art of Thailand, Muay Thai • Second Degree Black Belt in the Korean martial art of Tae Kwon Do • First degree Black Belt in American martial art of Gun-Go-Bang

Advanced Estate Planning and Administration 2016 4–1

1 6/2/2016

Chapter 4—Firearms in Estate Administration

Source of Law

• YOU SHALL NOT KILL, Exodus 20:13 See also, Catechism of the Catholic Church, Second Edition, Sections 2263-2269 • Oregon Constitution, Article 1, Section 27. Right To Bear Arms; Military Subordinate To Civil Power. The people shall have the right to bear arms for the defence of themselves. . . • District of Columbia v. Heller, 554 U.S. 570 (2008) (inherent right of self-defense).

Four Rules of Gun Safety RULE I: ALL GUNS ARE ALWAYS LOADED.

Advanced Estate Planning and Administration 2016 4–2

2 6/2/2016

Chapter 4—Firearms in Estate Administration

RULE II: NEVER LET THE MUZZLE COVER ANYTHING YOU ARE NOT WILLING TO DESTROY.

RULE III: KEEP YOUR FINGER OFF THE TRIGGER UNTIL YOUR SIGHTS ARE ON THE TARGET AND YOU ARE READY TO SHOOT.

Advanced Estate Planning and Administration 2016 4–3

3 6/2/2016

Chapter 4—Firearms in Estate Administration

RULE IV: BE SURE OF YOUR TARGET AND BACKSTOP

“A person is no more armed because they own a firearm than they are a musician because they own a piano.” Col. Jeff Cooper

Advanced Estate Planning and Administration 2016 4–4

4 6/2/2016

Chapter 4—Firearms in Estate Administration

Training Resources

• ThunderRanch, Oregon. 96747 Highway 140, Lakeview, OR 97630 thunderranchinc.com • Oregon Firearms Academy PO Box 909 Lebanon, OR 97355. (541) 451-5532 oregonfirearmsacademy.com • Massad Ayoob Group. PO Box 1477 Live Oak, Florida 32064. massadayoobgroup.com • REACT Training Systems, P O Box 8, Bend, OR 97709. reacttrainingsystems.com

The National Firearms Act of 1934

• Restricted and Taxed Fully Automatic Weapons (machineguns, automatic rifles, and submachineguns) • Restricted and Taxed Suppressors and Destructive Devices • Instituted barrel length requirements for: – Rifles = 16” – Shotguns = 18” – Instituted Overall Length Requirement of 26”

Advanced Estate Planning and Administration 2016 4–5

5 6/2/2016

Chapter 4—Firearms in Estate Administration

NFA Imposed A Tax

• General Rule: – Machineguns $200 – Short Barreled Rifles $200 – Short Barreled Shotguns $200 – Suppressors $200

• The tax has not changed since 1934.

Measuring Barrel Length

• Barrels are measured from a closed bolt. • Barrels are measured by inserting a dowel rod into the barrel until the rod stops against the bolt or breech-face. The rod is then marked at the furthermost end of the barrel or permanently attached muzzle device, withdrawn from the barrel, and measured. • ATF NFA Handbook, Chapter 2, Section 2.11

Advanced Estate Planning and Administration 2016 4–6

6 6/2/2016

Chapter 4—Firearms in Estate Administration

Short Barrels and Overall Length

• Short Barreled Rifles (SBRs)—this category includes any firearm with a buttstock and either a Rifled Barrel less than 16" long or an overall length under 26". • Short Barreled Shotguns (SBS)—this category is defined similarly to SBRs, but with either a SMOOTHBORE barrel less than 18" long or a minimum overall length under 26". • ATF NFA Handbook, Chapter 2, Section 2.1

“Any Other Weapon” Exception the Marble Game Getter

See image at http://www.outyourbackdoor.com/images/articles/211458_game.getter.b.jpg

Advanced Estate Planning and Administration 2016 4–7

7 6/2/2016

Chapter 4—Firearms in Estate Administration

Serbu Super Shorty Short Barreled Shotgun or Any Other Weapon?

Answer: Any Other Weapon

• Originally manufactured in the illustrated configuration and are not modified from existing shotguns. • ATF NFA Handbook at Chapter 2, Section 2.1.5

Advanced Estate Planning and Administration 2016 4–8

8 6/2/2016

Chapter 4—Firearms in Estate Administration

HANDGUN OR RIFLE?

See image at http://media.midwayusa.com/productimages/ 880x660/alt1/183/183074.jpg

United States v. Thompson-Center Arms Company 504 US 505 (1992)

See image at https://s3.amazonaws.com/mgm- content/sites/armslist/uploads/posts/2011/03/13/1099 41_01_ar_15_pistol_upper_assembly_640.jpg

Advanced Estate Planning and Administration 2016 4–9

9 6/2/2016

Chapter 4—Firearms in Estate Administration

Machinegun

• Firearms within the definition of machinegun include weapons that shoot, are designed to shoot, or can be readily restored to shoot, automatically more than one shot without manual reloading by a single function of the trigger. • ATF NFA Handbook, Chapter 2, Section 2.1.6

Destructive Device

• The destructive device definition contains different categories that address specific types of munitions. – Explosive Devices (grenades, bombs) – Large Caliber Weapons (Mortars, Cannons) – NOTE: Does not apply to antique firearms (such as a civil war cannon). – ATF NFA Handbook, Chapter 2, Section 2.1.8

Advanced Estate Planning and Administration 2016 4–10

10 6/2/2016

Chapter 4—Firearms in Estate Administration

Removing machineguns and silencers from the scope of the NFA. • The receiver of a machinegun or all the components of a silencer must be destroyed. • The preferred method for destroying a machinegun receiver is to completely sever the receiver in specified locations by means of a cutting torch that See image at http://14544-presscdn-0- 64.pagely.netdna-cdn.com/wp- displaces at least one-quarter content/uploads/2015/05/rainier-arms-ultramatch- inch of material at each cut billet-ambi-lower-ar-15-mod-3-max-slowik.jpg location. • Note: a machinegun receiver that is not properly destroyed may still be classified as a machinegun! • ATF NFA Handbook, Chapter 2, Section 2.5

Special Occupations Tax (SOT)

• A Subset of Federal Firearms Licensee – Applies to Importers, Manufacturers, and Dealers of NFA items. • Manufacturing Includes: – Ex: Providing Workstations for 80% Lowers conversions into operational lower. – Ex: 3D Printing. • ATF Rul. 2015-1, January 2, 2015; ATF Ruling 2010-10 clarified.

Advanced Estate Planning and Administration 2016 4–11

11 6/2/2016

Chapter 4—Firearms in Estate Administration

Muzzle Loaders—Not Regulated Josey Wales and his Colt Walker .44 • Section 2.2 Antique firearm. Firearms defined by the NFA as “antique firearms” are not subject to any controls under the NFA. • Section 2.3 Curios or relics. Curios or relics are firearms that are of special interest to collectors. • ATF NFA Handbook at Chapter 2

NFA Does Not Apply to Ordinary Hunting , Sport Shooting, or Self- Defense Firearms

Advanced Estate Planning and Administration 2016 4–12

12 6/2/2016

Chapter 4—Firearms in Estate Administration

The Gun Control Act of 1968

• Created the Federal Firearms Licensee – Interstate transfers must go through an FFL – Ended the direct Mail-Order of Firearms – Prohibits most felons, drug users, spouse abusers, and people found mentally incompetent from buying firearms

Transfer Under Federal Law

• The Selling, Assigning, Pledging, Leasing, Loaning, Giving Away, or Otherwise Disposing of a Firearm. • Source-26 U.S.C. 5845(j) • ATF Form 4, Definition (i); • ATF NFA Handbook, Chapter 9, Section 9.1

Advanced Estate Planning and Administration 2016 4–13

13 6/2/2016

Chapter 4—Firearms in Estate Administration

The Transfer of a gun to a resident of another state is prohibited. 18 USC 922(e) • Daughter Lives in Montana. • Daughter Arrives in Oregon for Christmas. • Dad Gives Rifle as a Christmas Gift. • Daughter Takes Rifle to Montana. • Is this prohibited? • What if Dad ships rifle to Daughter in Montana?

Laws of Other States

• California: • New Jersey: • Assault Weapon Ban • Requires a Firearm • Magazine Restriction Purchaser Permit • Bullet Buttons • Law Applies to Black • https://oag.ca.gov/firea Powder Firearms rms/faqs • http://www.njsp.org/fir earms/firearms- faqs.shtml

Advanced Estate Planning and Administration 2016 4–14

14 6/2/2016

Chapter 4—Firearms in Estate Administration

Clip vs. Detachable Box Magazine

Suppressor Legality 2016

Advanced Estate Planning and Administration 2016 4–15

15 6/2/2016

Chapter 4—Firearms in Estate Administration

Form 4473

• Required for Firearm Purchases or Transfers – Basis of the NICS Background Check System – Straw Purchases prohibited – San Bernadino Shooter used a Straw Purchaser • Marquez – Columbine Shooters Used a Straw Purchaser • Robyn Anderson (with whom Klebold attended the prom three days before the shooting) – Thurston High—Kip Kinkel’s parents

Identify Prohibited Person 18 USC 922(g)

• Transfers of firearms to any such prohibited persons are also unlawful. – under indictment for a crime punishable by prison exceeding one year; – convicted of a crime punishable by prison exceeding one year; – who is a fugitive from justice; – who is an unlawful user of or addicted to any controlled substance; – who has been adjudicated as a mental defective or has been committed to any mental institution; – who is an illegal alien; – who has been discharged from the military under dishonorable conditions; – who has renounced his or her United States citizenship; – who is subject to an order restraining the person from harassing, stalking, or threatening an intimate partner or partner’s child ; or – who has been convicted of a misdemeanor crime of domestic violence

Advanced Estate Planning and Administration 2016 4–16

16 6/2/2016

Chapter 4—Firearms in Estate Administration

Transfer--Oregon

• 166.435 Firearm transfers by unlicensed persons; requirements; exceptions; penalties. (1) As used in this section: • (a) “Transfer” means the delivery of a firearm from a transferor to a transferee, including, but not limited to, the sale, gift, loan or lease of the firearm. “Transfer” does not include the temporary provision of a firearm to a transferee if the transferor has no reason to believe the transferee is prohibited from possessing a firearm or intends to use the firearm in the commission of a crime, and the provision occurs: • (A) At a shooting range, shooting gallery or other area designed for the purpose of target shooting, for use during target practice, a firearms safety or training course or class or a similar lawful activity; • (B) For the purpose of hunting, trapping or target shooting, during the time in which the transferee is engaged in activities related to hunting, trapping or target shooting; • (C) Under circumstances in which the transferee and the firearm are in the presence of the transferor; • (D) To a transferee who is in the business of repairing firearms, for the time during which the firearm is being repaired; • (E) To a transferee who is in the business of making or repairing custom accessories for firearms, for the time during which the accessories are being made or repaired; or • (F) For the purpose of preventing imminent death or serious physical injury, and the provision lasts only as long as is necessary to prevent the death or serious physical injury.

Loan of Rifle for Hunting

• Brian drops by friend’s house after work • Friend is going hog hunting. • Invites Brian along, lends Brian rifle. • Next day, Brian returns rifle? • Does this comply with 166.435(b) “For the purpose of hunting, trapping or target shooting, during the time in which the transferee is engaged in activities related to hunting, trapping or target shooting”

Advanced Estate Planning and Administration 2016 4–17

17 6/2/2016

Chapter 4—Firearms in Estate Administration

Loan of Rifle For Hunting

• Brian borrows rifle from neighbor in Month 1 • Brian chooses ammo and sights in rifle for needs • Brian hunts hogs in Month 2 • Brian returns rifle • Does this comply with 166.435(b)?

Self Defense

• Brian loans handgun to Female for self defense. • Female is a single adult living alone. • ORS 166.435(f) is this: For the purpose of preventing imminent death or serious physical injury, and the provision lasts only as long as is necessary to prevent the death or serious physical injury?

Advanced Estate Planning and Administration 2016 4–18

18 6/2/2016

Chapter 4—Firearms in Estate Administration

Oregon Transfer Exceptions

• 166.435 Firearm transfers by unlicensed persons; requirements; exceptions; penalties. (Transferee must be lawfully able to possess guns)

• (4) The requirements of subsections (2) and (3) of this section do not apply to: (c) The transfer of a firearm to: – (A) Spouse or domestic partner; – (B) A transferor’s parent or stepparent; – (C) A transferor’s child or stepchild; – (D) A transferor’s sibling; – (E) A transferor’s grandparent; – (F) A transferor’s grandchild; – (G) A transferor’s aunt or uncle; – (H) A transferor’s first cousin; – (I) A transferor’s niece or nephew; or – (J) The spouse or domestic partner of a person specified in subparagraphs (B) to (I) of this paragraph.

Oregon Inheritance Exceptions

• 166.435 (d) The transfer of a firearm that occurs because of the death of the firearm owner, provided that: • (A) The transfer is conducted or facilitated by a personal representative, as defined in ORS 111.005, or a trustee of a trust created in a will; and • (B) The transferee is related to the deceased firearm owner in a manner specified in paragraph (c) of this subsection. • (5)(a) A transferor who fails to comply with the requirements of this section commits a Class A misdemeanor. • (b) Notwithstanding paragraph (a) of this subsection, a transferor who fails to comply with the requirements of this section commits a Class B felony if the transferor has a previous conviction under this section at the time of the offense.

Advanced Estate Planning and Administration 2016 4–19

19 6/2/2016

Chapter 4—Firearms in Estate Administration

NFA Firearms in an Estate (current) • A decedent’s registered NFA firearms may be conveyed tax-exempt to lawful heirs. • These distributions are not treated as voluntary “transfers” under the NFA. • Rather, they are considered to be involuntary “transfers by operation of law.” • ATF will honor State court decisions relative to the ownership and right to possess NFA firearms. • ATF will approve the distribution and registration to the heirs if the transactions are otherwise lawful. • A lawful heir is anyone named in the decedent’s will or, in the absence of a will, anyone entitled to inherit under the laws of the State in which the decedent last resided. • ATF NFA Handbook Section 9.5.3

NFA Firearms in an Estate, 27 CFR Part 479 (After July 13, 2016) • § 479.90a Estates. • (a) The personal representative in an estate (collectively "executor") may possess a firearm registered to a decedent during the term of probate without such possession being treated as a "transfer" as defined in§ 479.11. No later than the close of probate, the executor must submit an application to transfer the firearm to beneficiaries or other transferees in accordance with this section. If the transfer is to a beneficiary, the executor shall file an ATF Form 5 (5320.5), Application for Tax Exempt Transfer and Registration of Firearm.

• (b) If there are no beneficiaries of the estate or the beneficiaries do not wish to possess the registered firearm, the executor will dispose of the property outside the estate (i.e., to a non- beneficiary). The executor shall file an ATF Form 4 (5320.4), Application for Tax Paid Transfer and Registration of Firearm, in accordance with§ 479.84.

• (c) The personal representative in an estate shall submit with the transfer application documentation of the person's appointment as personal representative, a copy of the decedent's death certificate, a copy of the will (if any), any other evidence of the person's authority to dispose of property, and any other document relating to, or affecting the disposition of firearms from the estate.

Advanced Estate Planning and Administration 2016 4–20

20 6/2/2016

Chapter 4—Firearms in Estate Administration

Uncertainty about the registration status of decedents’ firearms • If the decedent’s firearms are not registered to him/her in the NFRTR, the firearms are contraband and may not be lawfully possessed or transferred. • If the executor cannot locate the decedent’s registration documents, he/she should contact the NFA Branch in writing and inquire about the firearms’ registration status. • This inquiry should include letters testamentary. ATF NFA handbook Section 9.5.3.3

Why Gun Trusts?

• Transfers to natural persons (individuals) must include a recent photograph, duplicate fingerprint cards, and a certification from the Chief Law Enforcement Officer of your Jurisdiction – PROBLEM—Some CLEOs refused to provide certification • Constructive Possession issues

Advanced Estate Planning and Administration 2016 4–21

21 6/2/2016

Chapter 4—Firearms in Estate Administration

Transfer of NFA Firearms to Persons other than an Individual (current) • CFR Section 479.85 requires the ATF Form 4 or Form 5 application to properly identify the transferee. • Transfers to natural persons (individuals) must include a recent photograph, duplicate fingerprint cards, and a certification from law enforcement. • The NFA also defines a person to include a partnership, company, association, trust, estate, or corporation. • The requirements for fingerprints, photographs, and the law enforcement certificate specified in § 479.85 are not applicable for transferee who is not an individual. • ATF requires that the Form 4 or Form 5 include documentation evidencing the existence of the entity.

Criminal Penalties

• Any person who violates or fails to comply with any provisions of this chapter shall, upon conviction, be fined not more than $10,000, or be imprisoned not more than ten years, or both. 26 USC 5871 • Raised to 30 years if part of drug trafficking -- 18 USC 924(c)(1).

Advanced Estate Planning and Administration 2016 4–22

22 6/2/2016

Chapter 4—Firearms in Estate Administration

Constructive Possession

• US v. Introcaso, 506 F.3d 260 (2007) – Husband, subject to restraining order, no longer residing at home, held to be in constructive possession. • US v. Jackson, 124 F.3rd 607 (1997) • US v. Williamson, 124 Fed Appx. 889 (2006)

Spouses and NFA Items

• Sarah has a Suppressor • Suppressor is locked in Gun Safe • Sarah has a Spouse, Jason, a stay-at-home dad • Jason has combination to Gun Safe • Sarah goes to work in the morning • Is Jason in Constructive Possession?

Advanced Estate Planning and Administration 2016 4–23

23 6/2/2016

Chapter 4—Firearms in Estate Administration

Gun Trusts after July 13, 2016

• Chief Law Enforcement Officer: Certification changed to notification. • All “responsible persons” must supply fingerprints and photographs. – Responsible person. In the case of an unlicensed entity, including any trust, partnership, association, company (including any Limited Liability Company (LLC) ), or corporation, any individual who possesses, directly or indirectly, the power or authority to direct the management and policies of the trust or entity to receive, possess, ship, transport, deliver, transfer, or otherwise dispose of a firearm for, or on behalf of, the trust or legal entity. – 41F at page 238

Responsible Person--Example

• Examples of who may be considered a responsible person include settlors/grantors, trustees, partners, members, officers, directors, board members, or owners. • An example of who may be excluded from this definition of responsible person is the beneficiary of a trust, if the beneficiary does not have the capability to exercise the powers or authorities enumerated in this section. • 41F at page 238

Advanced Estate Planning and Administration 2016 4–24

24 6/2/2016

Chapter 4—Firearms in Estate Administration

Online Gun Trust Options

• https://www.guntrustlawyer.com/ – Law Office of David M. Goldman, PLLC – Excellent Blog with information for all 50 states • http://www.myguntrust.com/ – Attorney Jim Willi – Also has an excellent blog • www.silencershop.com/nfa-gun-trust.html • https://silencerco.com/nfa-trust/

Additional Materials

• Regulation 41F: https://www.atf.gov/file/100896/download • ATF Handbook Chapter 2: https://www.atf.gov/firearms/docs/atf-national- firearms-act-handbook-chapter-2/download • ATF Handbook Chapter 9: • https://www.atf.gov/firearms/docs/atf-national- firearms-act-handbook-chapter-9/download

Advanced Estate Planning and Administration 2016 4–25

25 6/2/2016

Chapter 4—Firearms in Estate Administration

Additional Materials, cont’d

• 3D Printing of Firearms: https://www.atf.gov/qa-category/3-d- printing-technology-firearms • ATF Firearms FAQs: https://www.atf.gov/resource- center/docs/0501-firearms-top-10- qaspdf/download

YouTube Channels

• Larry A. Vickers: US Army Delta Force • https://www.youtube.com/user/VickersTacticalInc • John McQuay, 8541 Tactical USMC Scout/Sniper: https://www.youtube.com/user/LoneWolfUSMC • Ak47/74 Operators Union: Rob Ski, Veteran Polish Army Rifleman. https://www.youtube.com/user/AkOperatorsUnion • Jerry Miculek: https://www.youtube.com/user/MiculekDotCom

Advanced Estate Planning and Administration 2016 4–26

26 Chapter 4—Firearms in Estate Administration

Most Frequently Asked Firearms Questions and Answers

Prohibited Persons/NICS Denials:

1. I have been convicted of a felony. How do I reinstate my rights to possess a firearm?

2. Can a person prohibited by law from possessing a firearm acquire and use a black powder muzzle loading firearm?

3. I was the subject of a NICS check when I attempted to purchase a firearm from an FFL, and I received a delayed response or a denial. Please tell me why I did not receive a “proceed” response.

Transferring/Shipping/Possession of Firearms:

4. May I lawfully transfer a firearm to an individual who resides in a different State? What if the individual resides within the same State?

5. May I lawfully ship a firearm to myself in a different State?

6. May I lawfully ship a firearm directly to an out-of-State licensee, or must I have a licensee in my State ship it to him? May the licensee return the firearm to me, even if the shipment is across State lines?

7. What age must a person be to purchase a firearm from an FFL? Do those requirements apply when purchasing from other non-licensees?

Registration/Concealed Carry Permits/State Issues:

8. How do I register my firearm or remove my name from a firearms registration?

9. Does ATF issue a Concealed Carry Permit (CCP) that authorizes a person to carry a firearm throughout the United States?

Licensing Requirements (Dealer/Manufacturer/Importer/Exporter):

10. At what point should I obtain a Federal firearms license (FFL)? How do I obtain a FFL?

11. Do I need a Federal firearms license to make a firearm for my own personal use, provided it is not being made for resale?

12. How do I permanently export a firearm to another country? What type of license, if any, do I need to obtain?

Advanced Estate Planning and Administration 2016 4–27 Chapter 4—Firearms in Estate Administration

Prohibited Persons/NICS Denials:

1. I have been convicted of a felony. How do I reinstate my rights to possess a firearm?

Persons who have been convicted of a “crime punishable by imprisonment for a term exceeding one year,” as defined by 18 U.S.C. § 921(a)(20), are prohibited from receiving or possessing firearms under Federal law, 18 U.S.C. § 922(g)(1). Felons whose convictions have been set- aside or expunged, or for which the person has been pardoned or has had civil rights restored are not considered convicted under section 922(g)(1), unless that person was expressly prohibited by the law of the jurisdiction in which the proceedings were held from possessing firearms. Persons convicted of a State offense should contact the State Attorney General’s Office in the State in which they reside and the State of the conviction for information concerning State and local firearms restrictions, and any alternatives that may be available, such as a gubernatorial pardon or civil rights restoration. A list of State Attorney General contact numbers may be found at http://www.naag.org/.

If your conviction is for a Federal offense, you would regain the ability to lawfully receive, possess, or transport firearms if you receive a Presidential pardon. You can find additional information about such pardons by contacting the Office of the Pardon Attorney online at www.usdoj.gov/pardon/.

The GCA includes a provision that gives ATF authority to grant relief from Federal firearms disabilities. 18 U.S.C. § 925(c). However, since 1992, ATF’s annual Congressional appropriation has prohibited ATF from expending any funds to investigate or act upon applications for relief from Federal firearms disabilities submitted by individuals. As long as this provision is included in ATF appropriations, ATF cannot act upon such applications for relief.

2. Can a person prohibited by law from possessing a firearm acquire and use a black powder muzzle loading firearm?

The Gun Control Act of 1968 (GCA) prohibits felons and certain other persons from possessing or receiving firearms and ammunition (“prohibited persons”). These categories can be found at 18 U.S.C. § 922(g) and (n) in http://www.atf.gov/files/publications/download/p/atf-p-5300-4.pdf.

However, Federal law does not prohibit these persons from possessing or receiving an antique firearm. The term “antique firearm” means any firearm (including any firearm with a matchlock, flintlock, percussion cap, or similar type of ignition system) manufactured in or before 1898. The definition includes any replica of an antique firearm if it is not designed or redesigned for using rimfire or conventional centerfire fixed ammunition, or uses rimfire or conventional centerfire ammunition which is no longer manufactured in the United States, and which is not readily available in ordinary channels of commercial trade. Further, any muzzle loading rifle, shotgun, or pistol which is designed to use black powder or black powder substitute, and which cannot use fixed ammunition, is an “antique firearm” unless it (1) incorporates a firearm frame or receiver; (2) is a firearm which is converted into a muzzle loading weapon; or (3) is a muzzle

Advanced Estate Planning and Administration 2016 4–28 Chapter 4—Firearms in Estate Administration

loading weapon which can be readily converted to fire fixed ammunition by replacing the barrel, bolt, breechblock, or any combination thereof. See 18 U.S.C. § 921(a)(3), (a)(16).

Thus, a muzzle loading weapon that meets the definition of an “antique firearm” is not a firearm and may lawfully be received and possessed by a prohibited person under the GCA.

In addition, the GCA defines the term “ammunition” to mean “ammunition or cartridge cases, primers, bullets, or propellant powder designed for use in any firearm.” Because an “antique firearm” is not a “firearm,” it would be lawful for a prohibited person to receive or possess black powder designed for use in an “antique firearm.” Also, the Federal explosives laws do not make it unlawful for a prohibited person to acquire and possess black powder in quantities not exceeding fifty pounds if it is intended to be used solely for sporting, recreational, or cultural purposes in “antique firearms.” See 18 U.S.C. § 845(a)(5)

By contrast, a prohibited person may not receive or possess black powder firearms that can be readily converted to fire fixed ammunition by replacing the barrel, bolt, breechblock, or any combination thereof. ATF has classified certain muzzle loading models as firearms. All of these models incorporate the frame or receiver of a firearm that is capable of accepting barrels designed to fire conventional rimfire or centerfire fixed ammunition. These muzzle loading models do not meet the definition of “antique firearm” as that term is defined in 18 U.S.C. § 921(a)(16), and are “firearms” as defined in 18 U.S.C. § 921(a)(3). Furthermore, as firearms, these and similar models, regardless of the barrel installed on the firearm or provided with the firearm, are subject to all provisions of the GCA. Persons who purchase these firearms from licensed dealers are required to fill out a Firearms Transaction Record, ATF Form 4473, and are subject to a National Instant Criminal Background Check System (NICS) check. Felons and other prohibited persons may not lawfully receive or possess these firearms or ammunition.

The following is a list of weapons that load from the muzzle and are classified as firearms, not antiques, under the GCA, because they incorporate the frame or receiver of a firearm:

x Savage Model 10ML (early, 1st version) x Mossberg 500 shotgun with muzzle loading barrel x Remington 870 shotgun with muzzle loading barrel x Mauser 98 rifle with muzzle loading barrel x SKS rifle with muzzle loading barrel x PB sM10 pistol with muzzle loading barrel x H&R/New England Firearm Huntsman x Thompson Center Encore/Contender x Rossi .50 muzzle loading rifle

This list is not complete and frequently changes. There may be other muzzle loaders also classified as firearms. As noted, any muzzle loading weapon that is built on a firearm frame or receiver falls within the definition of a firearm provided in 18 U.S.C. § 921(a)(3).

Finally, even though a prohibited person may lawfully possess an antique firearm under Federal law, State or local law may classify such weapons as “firearms” subject to regulation. Any

Advanced Estate Planning and Administration 2016 4–29 Chapter 4—Firearms in Estate Administration

person considering acquiring a black powder weapon should contact his or her State Attorney General’s Office to inquire about the laws and possible State or local restrictions. A list of State Attorney General contact numbers may be found at http://www.naag.org/.

3. I was the subject of a NICS check when I attempted to purchase a firearm from an FFL, and I received a delayed response or a denial. Please tell me why I did not receive a “proceed” response.

ATF does not operate the National Instant Criminal Background Check System (NICS). It is administered by the Federal Bureau of Investigation (FBI). Please contact the NICS Customer Service Center at (877) 444-6427 for further assistance. You can also find information about the NICS system by visiting the FBI’s website at http://www.fbi.gov/about-us/cjis/nics.

Transferring/Shipping/Possession of Firearms:

4. May I lawfully transfer a firearm to an individual who resides in a different State? What if the individual resides within the same State?

Under Federal law, an unlicensed individual is prohibited from transferring a firearm to an individual who does not reside in the State where the transferee resides. Generally, for a person to lawfully transfer a firearm to an unlicensed person who resides out of State, the firearm must be shipped to a Federal Firearms Licensee (FFL) within the recipient’s State of residence. He or she may then receive the firearm from the FFL upon completion of an ATF Form 4473 and a NICS background check. More information can be obtained on the ATF website at www.atf.gov and http://www.atf.gov/firearms/faq/unlicensed-persons.html. The GCA provides an exception from this prohibition for temporary loans or rentals of firearms for lawful sporting purposes. For example, a friend visiting you may borrow a firearm from you to go hunting. Another exception is provided for transfers of firearms to nonresidents to carry out a lawful bequest or acquisition by intestate succession. This exception would authorize the transfer of a firearm to a nonresident who inherits a firearm under a will or by State law upon death of the owner. See 18 U.S.C. § 922(a)(5)(A).

In regard to transferring firearms between individuals residing in the same state, any person may sell a firearm to an unlicensed resident of the State where he resides as long as he or she does not know or have reasonable cause to believe the person is prohibited from receiving or possessing firearms under Federal law. Please note that there may be State and local laws that regulate firearm transactions. Any person considering acquiring or transferring a firearm should contact his or her State Attorney General’s Office to inquire about the laws and possible State or local firearms restrictions. A list of State Attorney General contact numbers may be found at http://www.naag.org/.

5. May I lawfully ship a firearm to myself in a different State?

Any person may ship a firearm to himself or herself in the care of another person in the State where he or she intends to hunt or engage in any other lawful activity. The package should be

Advanced Estate Planning and Administration 2016 4–30 Chapter 4—Firearms in Estate Administration

addressed to the owner of the firearm “in the care of” the out-of-State resident. Upon reaching its destination, persons other than the owner of the firearm must not open the package or take possession of the firearm. The out-of-State resident is encouraged to place the package in a safe and secure location until the owner of the firearm is available to take physical possession.

Any person may ship firearms directly to a licensee in any State, with no requirement for another licensee to ship the firearm. However, handguns and other concealable firearms are not mailable through the United States Postal Service and must be shipped via private common or contract carrier (18 U.S.C. § 1715). The USPS and private common or contract carriers may also have additional restrictions on firearms shipments by unlicensed persons. Firearms shipped to FFLs for repair or any other lawful purpose may be returned to the person from whom received without transferring the firearm through an FFL in the recipient’s State of residence. FFLs may also return a replacement firearm of the same kind and type to the person from whom received (18 U.S.C. § 922(a)(2)(A)). An ATF Form 4473 is required for the return of the firearm, except in instances when a firearm is delivered to a licensee for the sole purpose of repair or customizing, and the same firearm or a replacement firearm is returned to the person from whom received (27 CFR § 478.124(a)).

7. What age must a person be to purchase a firearm from an FFL? Do those requirements apply when purchasing from other non-licensees?

It is unlawful for any Federal firearms licensee (FFL) to sell or deliver any firearm or ammunition to anyone he knows or has reasonable cause to believe is less than eighteen years of age. It is unlawful for an FFL to sell or deliver a firearm other than a rifle or shotgun or ammunition for a firearm other than a rifle or shotgun to any individual who he knows or has reasonable cause to believe is less than 21 years of age. See 18 U.S.C. § 922(b)(1).

However, an unlicensed individual may sell or transfer any firearm to an individual over the age of 18 who resides in the same State, provided that he does not know or have reasonable cause to believe the person is prohibited from receiving or possessing firearms under Federal law.

Please note that there may be State laws that prohibit the possession of firearms, including handguns, by an individual who is under 21 years of age. You should contact your State’s Attorney General Office to inquire about the laws and possible restrictions in your State concerning possession of firearms. A list of State Attorney General Offices may be found at http://www.naag.org/.

Registration/Concealed Carry Permits/State Issues:

8. How do I register my firearm or remove my name from a firearms registration?

Advanced Estate Planning and Administration 2016 4–31 Chapter 4—Firearms in Estate Administration

There is no Federal registration requirement for most conventional sporting firearms. Only those firearms subject to the National Firearms Act (NFA) (e.g., machineguns, short-barrel firearms, silencers, destructive devices, any other weapons) must be registered with ATF. For information on the registration and transfer provisions of the National Firearms Act, please refer to the ATF NFA Handbook at https://www.atf.gov/sites/default/files/assets/pdf-files/atf-p-5320-8.pdf or contact the ATF NFA Branch at (304) 616-4500. Please note that firearms registration may be required by State or local law. Any person considering acquiring a firearm should contact his or her State Attorney General’s Office to inquire about the laws and possible State or local restrictions. A list of State Attorney General contact numbers may be found at http://www.naag.org/.

Firearms owners are encouraged to maintain personal records of their firearms to aid in recovery or investigation by State or local law enforcement agencies in the event a privately-owned firearm is stolen or lost. ATF recommends utilizing ATF Form 3312.8, Personal Firearms Record.

9. Does ATF issue a Concealed Carry Permit (CCP) that authorizes a person to carry a firearm throughout the United States?

Neither ATF nor any other Federal agency issues such a permit or license. CCPs may be issued by a State or local government.

Licensing Requirements (Dealer/Manufacturer/Importer/Exporter):

10. At what point should I obtain a Federal firearms license (FFL)? How do I obtain a FFL?

Federal law requires a Federal firearms license if you are engaged in the business as a firearms dealer, manufacturer or importer. A person is engaged in those businesses, as it applies to each license type, as follows:

1. Manufacturer of firearms -- a person who devotes time, attention, and labor to manufacturing firearms as a regular course of trade or business with the principal objective of livelihood and profit through the sale or distribution of the firearms manufactured (18 U.S.C. § 921(a)(21)(A)); 2. Manufacturer of ammunition -- a person who devotes time, attention, and labor to manufacturing ammunition as a regular course of trade or business with the principal objective of livelihood and profit through the sale or distribution of the ammunition manufactured (18 U.S.C. § 921(a)(21)(B)); 3. Dealer in firearms -- a person who devotes time, attention, and labor to dealing in firearms as a regular course of trade or business with the principal objective of livelihood and profit through the repetitive purchase and resale of firearms, but such term shall not include a person who makes occasional sales, exchanges, or purchases of firearms for the enhancement of a personal collection or for a hobby, or who sells all or part of his personal collection of firearms (18 U.S.C. § 921(a)(21)(C));

Advanced Estate Planning and Administration 2016 4–32 Chapter 4—Firearms in Estate Administration

4. Dealer in firearms (gunsmith) -- a person who devotes time, attention, and labor to engaging in such activity as a regular course of trade or business with the principal objective of livelihood and profit, but such term shall not include a person who makes occasional repairs of firearms, or who occasionally fits special barrels, stocks, or trigger mechanisms to firearms (18 U.S.C. § 921(a)(21)(D)); 5. Dealer in firearms (pawnbroker) – a person whose business or occupation includes the taking or receiving, by way of pledge or pawn, of any firearm as security for the payment or repayment of money (18 U.S.C. § 921(a)(12)); 6. Importer of firearms -- a person who devotes time, attention, and labor to importing firearms as a regular course of trade or business with the principal objective of livelihood and profit through the sale or distribution of the firearms imported (18 U.S.C. § 921(a)(21)(E)); 7. Importer of ammunition -- a person who devotes time, attention, and labor to importing ammunition as a regular course of trade or business with the principal objective of livelihood and profit through the sale or distribution of the ammunition imported (18 U.S.C. § 921(a)(21)(F)).

The term “principal objective of livelihood and profit” is further defined as the intent underlying the sale or disposition of firearms as predominantly one of obtaining livelihood and pecuniary gain, as opposed to other intents such as improving or liquidating a personal firearms collection: Provided, that proof of profit shall not be required as to a person who engages in the regular and repetitive purchase and disposition of firearms for criminal purposes or terrorism.

Note that there is no particular minimum number of firearms that must be sold, manufactured, or imported specified by law to be “engaged in the business.” Whether a person has been engaged in the business of dealing, manufacturing, or importing firearms, is made on a case-by-case basis. Considerations include, but are not limited to: the quantity of firearms sold, manufactured, or imported; the frequency of transactions over a period of time; the intent of the person in acquiring and disposing of firearms; and any representations made to the buyer regarding the person’s ability and willingness to obtain or transfer firearms. We recommend that you contact your local ATF office (http://www.atf.gov/field/index.html) to evaluate the facts and circumstances of your particular case.

Information on how to become a Federal firearms licensee is available at: http://www.atf.gov/firearms/how-to/become-an-ffl.html.

11. Do I need a Federal firearms license to make a firearm for my own personal use, provided it is not being made for resale?

Firearms may be lawfully made by persons who do not hold a manufacturer’s license under the GCA provided they are not for sale or distribution and the maker is not prohibited from receiving or possessing firearms. However, a person is prohibited from assembling a non-sporting semiautomatic rifle or shotgun from 10 or more imported parts, as set forth in regulations in 27 CFR 478.39. In addition, the making of an NFA firearm requires a tax payment and advance approval by ATF. An application to make a machinegun will not be approved unless documentation is submitted showing that the firearm is being made for the official use of a

Advanced Estate Planning and Administration 2016 4–33 Chapter 4—Firearms in Estate Administration

Federal, State or local government agency (18 U.S.C. § 922(o),(r); 26 U.S.C. § 5822; 27 CFR §§ 478.39, 479.62, and 479.105).

Additionally, although markings are not required on firearms manufactured for personal use (excluding NFA firearms), owners are recommended to conspicuously place or engrave a serial number and/ or other marks of identification to aid in investigation or recovery by State or local law enforcement officials in the event of a theft or loss of the privately owned firearm.

12. How do I permanently export a firearm to another country? What type of license, if any, do I need to obtain?

The Gun Control Act (GCA) does not require an export license. Export provisions of the Arms Export Control Act of 1976 for firearms, excluding sporting shotguns, fall under the purview of the Department of State. Regulations implementing this Act generally require a license to be obtained from the Directorate of Defense Trade Controls, Department of State, PM/DDTC, SA- 1, Room 1200, 2401 E St., N.W., Washington, DC 20037; (202) 663-1282. Additional information may be accessed online at: http://www.pmddtc.state.gov/index.html.

The export of sporting shotguns and ammunition for sporting shotguns is regulated by the U.S. Department of Commerce rather than the U.S. Department of State. An export license is generally needed to export these shotguns and shotgun ammunition. For further information, please contact your nearest Department of Commerce district office or the Bureau of Industry and Security, Outreach and Educational Services Division, U.S. Department of Commerce, 14th St. & Pennsylvania Ave. N.W., Washington, DC 20230, (202) 482-4811. Additional information may be accessed online at: http://www.bis.doc.gov/licensing/exportsoffirearms.htm.

Advanced Estate Planning and Administration 2016 4–34 Chapter 4—Firearms in Estate Administration

OMB No. 1140-0020 U.S. Department of Justice Bureau of Alcohol, Tobacco, Firearms and Explosives Firearms Transaction Record Part I - Over-the-Counter

WARNING: You may not receive a firearm if prohibited by Federal or State law. The information you provide will Transferor's Transaction be used to determine whether you are prohibited under law from receiving a firearm. Certain violations of the Gun Serial Number (If any) Control Act, 18 U.S.C. §§ 921 et. seq., are punishable by up to 10 years imprisonment and/or up to a $250,000 fine.

Prepare in original only. All entries must be handwritten in ink. Read the Notices, Instructions, and Definitions on this form. “PLEASE PRINT.” Section A - Must Be Completed Personally By Transferee (Buyer) 1. Transferee’s Full Name Last Name First Name Middle Name (If no middle name, state “NMN”)

2. Current Residence Address (U.S. Postal abbreviations are acceptable. Cannot be a post office box.) Number and Street Address City County State ZIP Code

3. Place of Birth 4. Height 5. Weight 6. Gender 7. Birth Date U.S. City and State -OR- Foreign Country Ft. (Lbs.) Male Month Day Year In. Female 8. Social Security Number (Optional, but will help prevent misidentification) 9. Unique Personal Identification Number (UPIN) if applicable (See Instructions for Question 9.)

10.a. Ethnicity 10.b. Race (Check one or more boxes.) Hispanic or Latino American Indian or Alaska Native Black or African American White Not Hispanic or Latino Asian Native Hawaiian or Other Pacific Islander 11. Answer questions 11.a. (see exceptions) through 11.l. and 12 (if applicable) by checking or marking “yes” or “no” in the boxes to the right of the questions. a. Are you the actual transferee/buyer of the firearm(s) listed on this form? Warning: You are not the actual buyer if you are Yes No acquiring the firearm(s) on behalf of another person. If you are not the actual buyer, the dealer cannot transfer the firearm(s) to you. (See Instructions for Question 11.a.) Exception: If you are picking up a repaired firearm(s) for another person, you are not required to answer 11.a. and may proceed to question 11.b. b. Are you under indictment or information in any court for a felony, or any other crime, for which the judge could imprison you for Yes No more than one year? (See Instructions for Question 11.b.) c. Have you ever been convicted in any court of a felony, or any other crime, for which the judge could have imprisoned you for more Yes No than one year, even if you received a shorter sentence including probation? (See Instructions for Question 11.c.) d. Are you a fugitive from justice? Yes No

e. Are you an unlawful user of, or addicted to, marijuana or any depressant, stimulant, narcotic drug, or any other controlled substance? Yes No

f. Have you ever been adjudicated mentally defective (which includes a determination by a court, board, commission, or other lawful authority that you are a danger to yourself or to others or are incompetent to manage your own affairs) OR have you ever been Yes No committed to a mental institution? (See Instructions for Question 11.f.) g. Have you been discharged from the Armed Forces under dishonorable conditions? Yes No h. Are you subject to a court order restraining you from harassing, stalking, or threatening your child or an intimate partner or child of Yes No such partner? (See Instructions for Question 11.h.) i. Have you ever been convicted in any court of a misdemeanor crime of domestic violence? (See Instructions for Question 11.i.) Yes No

j. Have you ever renounced your United States citizenship? Yes No

k. Are you an alien illegally in the United States? Yes No

l. Are you an alien admitted to the United States under a nonimmigrant visa? (See Instructions for Question 11.l.) If you answered Yes No “no” to this question, do NOT respond to question 12 and proceed to question 13. 12. If you are an alien admitted to the United States under a nonimmigrant visa, do you fall within any of the exceptions set forth in the Yes No instructions? (If “yes,” the licensee must complete question 20c.) (See Instructions for Question 12.) If question 11.l. is answered with a “no” response, then do NOT respond to question 12 and proceed to question 13. 13. What is your State of residence 14. What is your country of citizenship? (List/check more than 15. If you are not a citizen of the United States, (if any)? (See Instructions for one, if applicable. If you are a citizen of the United States, what is your U.S.-issued alien number or Question 13.) proceed to question 16.) United States of America admission number? Other (Specify) Note: Previous Editions Are Obsolete Transferee (Buyer) Continue to Next Page ATF Form 4473 (5300.9) Part I Page 1 of 6 STAPLE IF PAGES BECOME SEPARATED Revised April 2012

Advanced Estate Planning and Administration 2016 4–35 Chapter 4—Firearms in Estate Administration

I certify that my answers to Section A are true, correct, and complete. I have read and understand the Notices, Instructions, and Definitions on ATF Form 4473. I understand that answering “yes” to question 11.a. if I am not the actual buyer is a crime punishable as a felony under Federal law, and may also violate State and/or local law. I understand that a person who answers “yes” to any of the questions 11.b. through 11.k. is prohibited from purchasing or receiving a firearm. I understand that a person who answers “yes” to question 11.l. is prohibited from purchasing or receiving a firearm, unless the person also answers “Yes” to question 12. I also understand that making any false oral or written statement, or exhibiting any false or misrepresented identification with respect to this transaction, is a crime punishable as a felony under Federal law, and may also violate State and/or local law. I further understand that the repetitive purchase of firearms for the purpose of resale for livelihood and profit without a Federal firearms license is a violation of law (See Instructions for Question 16). 16. Transferee’s/Buyer’s Signature 17. Certification Date

Section B - Must Be Completed By Transferor (Seller) 18. Type of firearm(s) to be transferred (check or mark all that apply): 19. If sale at a gun show or other qualifying event.

Handgun Long Gun Other Firearm (Frame, Receiver, etc. Name of Event (rifles or See Instructions for Question 18.) shotguns) City, State 20a. Identification (e.g., Virginia Driver’s license (VA DL) or other valid government-issued photo identification.) (See Instructions for Question 20.a.) Issuing Authority and Type of Identification Number on Identification Expiration Date of Identification (if any) Month Day Year

20b. Alternate Documentation (if driver’s license or other identification document does not show current residence address) (See Instructions for Question 20.b.)

20c. Aliens Admitted to the United States Under a Nonimmigrant Visa Must Provide: Type of documentation showing an exception to the nonimmigrant visa prohibition. (See Instructions for Question 20.c.)

Questions 21, 22, or 23 Must Be Completed Prior To The Transfer Of The Firearm(s) (See Instructions for Questions 21, 22 and 23.) 21a. Date the transferee’s identifying information in Section A was transmit- 21b. The NICS or State transaction number (if provided) was: ted to NICS or the appropriate State agency: (Month/Day/Year) Month Day Year

21c. The response initially provided by NICS or the appropriate State 21d. If initial NICS or State response was “Delayed,” the following agency was: response was received from NICS or the appropriate State agency: Proceed Delayed Proceed (date) Denied [The firearm(s) may be transferred on Denied (date) (Missing Disposition Cancelled Information date provided by NICS) if State law Cancelled (date) permits (optional)] No resolution was provided within 3 business days. 21e. (Complete if applicable.) After the firearm was transferred, the following response was received from NICS or the appropriate State agency on: (date). Proceed Denied Cancelled 21f. The name and Brady identification number of the NICS examiner (Optional)

(name) (number) 22. No NICS check was required because the transfer involved only National Firearms Act firearm(s). (See Instructions for Question 22.)

23. No NICS check was required because the buyer has a valid permit from the State where the transfer is to take place, which qualifies as an exemption to NICS (See Instructions for Question 23.) Issuing State and Permit Type Date of Issuance (if any) Expiration Date (if any) Permit Number (if any)

Section C - Must Be Completed Personally By Transferee (Buyer) If the transfer of the firearm(s) takes place on a different day from the date that the transferee (buyer) signed Section A, the transferee must complete Section C immediately prior to the transfer of the firearm(s). (See Instructions for Question 24 and 25.) I certify that my answers to the questions in Section A of this form are still true, correct and complete. 24. Transferee’s/Buyer’s Signature 25. Recertification Date

Transferor (Seller) Continue to Next Page STAPLE IF PAGES BECOME SEPARATED

ATF Form 4473 (5300.9) Part I Page 2 of 6 Revised April 2012

Advanced Estate Planning and Administration 2016 4–36 Chapter 4—Firearms in Estate Administration

Section D - Must Be Completed By Transferor (Seller) 26. 27. 28. 29. 30. Manufacturer and/or Importer (If the Model Serial Number Type (pistol, revolver, rifle, Caliber or manufacturer and importer are different, shotgun, receiver, frame, Gauge the FFL should include both.) etc.) (See instructions for question 29)

30a. Total Number of Firearms (Please handwrite by printing e.g., one, two, three, etc. Do not use numerals.) 30b. Is any part of this transaction a Pawn Redemption? Yes No 30c. For Use by FFL (See Instructions for Question 30c.)

Complete ATF Form 3310.4 For Multiple Purchases of Handguns Within 5 Consecutive Business Days 31. Trade/corporate name and address of transferor (seller) (Hand stamp may be 32. Federal Firearms License Number (Must contain at least first used.) three and last five digits of FFL Number X-XX-XXXXX.) (Hand stamp may be used.)

The Person Transferring The Firearm(s) Must Complete Questions 33-36. For Denied/Cancelled Transactions, The Person Who Completed Section B Must Complete Questions 33-35. I certify that my answers in Sections B and D are true, correct, and complete. I have read and understand the Notices, Instructions, and Definitions on ATF Form 4473. On the basis of: (1) the statements in Section A (and Section C if the transfer does not occur on the day Section A was completed); (2) my verification of the identification noted in question 20a (and my reverification at the time of transfer if the transfer does not occur on the day Section A was completed); and (3) the information in the current State Laws and Published Ordinances, it is my belief that it is not unlawful for me to sell, deliver, transport, or otherwise dispose of the firearm(s) listed on this form to the person identified in Section A. 33. Transferor’s/Seller’s Name (Please print) 34. Transferor’s/Seller’s Signature 35. Transferor’s/Seller’s Title 36. Date Transferred

NOTICES, INSTRUCTIONS AND DEFINITIONS If you or the buyer discover that an ATF Form 4473 is incomplete or improperly completed after the firearm has been transferred, and you or the buyer wish to Purpose of the Form: The information and certification on this form are make a record of your discovery, then photocopy the inaccurate form and make designed so that a person licensed under 18 U.S.C. § 923 may determine if he any necessary additions or revisions to the photocopy. You only should make or she may lawfully sell or deliver a firearm to the person identified in changes to Sections B and D. The buyer should only make changes to Sections A Section A, and to alert the buyer of certain restrictions on the receipt and and C. Whoever made the changes should initial and date the changes. The possession of firearms. This form should only be used for sales or transfers corrected photocopy should be attached to the original Form 4473 and retained as where the seller is licensed under 18 U.S.C. § 923. The seller of a firearm part of your permanent records. must determine the lawfulness of the transaction and maintain proper records of the transaction. Consequently, the seller must be familiar with the Over-the-Counter Transaction: The sale or other disposition of a firearm by a provisions of 18 U.S.C. §§ 921-931 and the regulations in 27 CFR Part 478. seller to a buyer, at the seller’s licensed premises. This includes the sale or other In determining the lawfulness of the sale or delivery of a long gun (rifle or disposition of a rifle or shotgun to a nonresident buyer on such premises. shotgun) to a resident of another State, the seller is presumed to know the applicable State laws and published ordinances in both the seller’s State and State Laws and Published Ordinances: The publication (ATF P 5300.5) of the buyer’s State. State firearms laws and local ordinances ATF distributes to licensees.

After the seller has completed the firearms transaction, he or she must make Exportation of Firearms: The State or Commerce Departments may require you the completed, original ATF Form 4473 (which includes the Notices, General to obtain a license prior to export. Instructions, and Definitions), and any supporting documents, part of his or her permanent records. Such Forms 4473 must be retained for at least 20 Section A years. Filing may be chronological (by date), alphabetical (by name), or numerical (by transaction serial number), as long as all of the seller’s Question 1. Transferee’s Full Name: The buyer must personally complete completed Forms 4473 are filed in the same manner. FORMS 4473 FOR Section A of this form and certify (sign) that the answers are true, correct, and DENIED/CANCELLED TRANSFERS MUST BE RETAINED: If the transfer complete. However, if the buyer is unable to read and/or write, the answers of a firearm is denied/cancelled by NICS, or if for any other reason the (other than the signature) may be completed by another person, excluding the transfer is not complete after a NICS check is initiated, the licensee must seller. Two persons (other than the seller) must then sign as witnesses to the retain the ATF Form 4473 in his or her records for at least 5 years. Forms buyer’s answers and signature. 4473 with respect to which a sale, delivery, or transfer did not take place shall be separately retained in alphabetical (by name) or chronological (by date of When the buyer of a firearm is a corporation, company, association, partnership, transferee’s certification) order. or other such business entity, an officer authorized to act on behalf of the

ATF Form 4473 (5300.9) Part I Page 3 of 6 Revised April 2012

Advanced Estate Planning and Administration 2016 4–37 Chapter 4—Firearms in Estate Administration

business must complete Section A of the form with his or her personal the jurisdiction where the conviction occurred, the person has been pardoned, the information, sign Section A, and attach a written statement, executed under conviction has been expunged or set aside, or the person has had their civil rights penalties of perjury, stating: (A) the firearm is being acquired for the use of (the right to vote, sit on a jury, and hold public office) taken away and later and will be the property of that business entity and (B) the name and address restored AND (2) the person is not prohibited by the law of the jurisdiction where of that business entity. If the buyer’s name in question 1. is illegible, the the conviction occurred from receiving or possessing firearms. Persons subject to seller must print the buyer’s name above the name written by the buyer. this exception should answer “no” to 11.c. or 11.i., as applicable.

Question 2. Current Residence Address: U.S. Postal abbreviations are Question 11.f. Adjudicated Mentally Defective: A determination by a court, acceptable. (e.g., St., Rd., Dr., PA, NC, etc.). Address cannot be a post office board, commission, or other lawful authority that a person, as a result of marked box. County and Parish are one and the same. subnormal intelligence, or mental illness, incompetency, condition, or disease: (1) is a danger to himself or to others; or (2) lacks the mental capacity to contract If the buyer is a member of the Armed Forces on active duty acquiring a or manage his own affairs. This term shall include: (1) a finding of insanity by a firearm in the State where his or her permanent duty station is located, but court in a criminal case; and (2) Those persons found incompetent to stand trial or does not reside at his or her permanent duty station, the buyer must list both found not guilty by reason of lack of mental responsibility. his or her permanent duty station address and his or her residence address in response to question 2. If you are a U.S. citizen with two States of residence, Committed to a Mental Institution: A formal commitment of a person to a you should list your current residence address in response to question 2 (e.g., mental institution by a court, board, commission, or other lawful authority. The if you are buying a firearm while staying at your weekend home in State X, term includes a commitment to a mental institution involuntarily. The term you should list your address in State X in response to question 2). includes commitment for mental defectiveness or mental illness. It also includes commitments for other reasons, such as for drug use. The term does not include a Question 9. Unique Personal Identification Number (UPIN): For person in a mental institution for observation or a voluntary admission to a mental purchasers approved to have information maintained about them in the FBI institution. Please also refer to Question 11.c. for the definition of a prohibited NICS Voluntary Appeal File, NICS will provide them with a Unique Personal person. Identification Number, which the buyer should record in question 9. The licensee may be asked to provide the UPIN to NICS or the State. EXCEPTION to 11. f. NICS Improvement Amendments Act of 2007: A person Question 11.a. Actual Transferee/Buyer: For purposes of this form, you are who has been adjudicated as a mental defective or committed to a mental the actual transferee/buyer if you are purchasing the firearm for yourself or institution is not prohibited if: (1) the person was adjudicated or committed by a otherwise acquiring the firearm for yourself (e.g., redeeming the firearm from department or agency of the Federal Government, such as the United States pawn/retrieving it from consignment, firearm raffle winner). You are also the Department of Veteran’s Affairs (“VA”) (as opposed to a State court, State board, actual transferee/buyer if you are legitimately purchasing the firearm as a gift or other lawful State authority); and (2) either: (a) the person’s adjudication or for a third party. ACTUAL TRANSFEREE/BUYER EXAMPLES: Mr. commitment for mental incompetency was set-aside or expunged by the Smith asks Mr. Jones to purchase a firearm for Mr. Smith. Mr. Smith gives Mr. adjudicating/committing agency; (b) the person has been fully released or Jones the money for the firearm. Mr. Jones is NOT THE ACTUAL TRANS- discharged from all mandatory treatment, supervision, or monitoring by the FEREE/BUYER of the firearm and must answer “NO” to question 11.a. The agency; or (c) the person was found by the agency to no longer suffer from the licensee may not transfer the firearm to Mr. Jones. However, if Mr. Brown mental health condition that served as the basis of the initial adjudication. goes to buy a firearm with his own money to give to Mr. Black as a present, Persons who fit this exception should answer “no” to Item 11.f. This Mr. Brown is the actual transferee/buyer of the firearm and should answer exception does not apply to any person who was adjudicated to be not guilty by “YES” to question 11.a. However, you may not transfer a firearm to any reason of insanity, or based on lack of mental responsibility, or found incompe- person you know or have reasonable cause to believe is prohibited under 18 tent to stand trial, in any criminal case or under the Uniform Code of Military U.S.C. § 922(g), (n), or (x). Please note: EXCEPTION: If you are picking Justice. up a repaired firearm(s) for another person, you are not required to answer 11.a. and may proceed to question 11.b. Question 11.h. Definition of Restraining Order: Under 18 U.S.C. § 922, firearms may not be sold to or received by persons subject to a court order that: Question 11.b. - 11.l. Definition of Prohibited Person: Generally, 18 (A) was issued after a hearing which the person received actual notice of and had U.S.C. § 922 prohibits the shipment, transportation, receipt, or possession in an opportunity to participate in; (B) restrains such person from harassing, stalking, or affecting interstate commerce of a firearm by one who: has been convicted or threatening an intimate partner or child of such intimate partner or person, or of a misdemeanor crime of domestic violence; has been convicted of a felony, engaging in other conduct that would place an intimate partner in reasonable or any other crime, punishable by imprisonment for a term exceeding one year fear of bodily injury to the partner or child; and (C)(i) includes a finding that (this does not include State misdemeanors punishable by imprisonment of such person represents a credible threat to the physical safety of such intimate two years or less); is a fugitive from justice; is an unlawful user of, or partner or child; or (ii) by its terms explicitly prohibits the use, attempted use, addicted to, marijuana or any depressant, stimulant, or narcotic drug, or any or threatened use of physical force against such intimate partner or child that other controlled substance; has been adjudicated mentally defective or has would reasonably be expected to cause bodily injury. An “intimate partner” of been committed to a mental institution; has been discharged from the Armed a person is: the spouse or former spouse of the person, the parent of a child of Forces under dishonorable conditions; has renounced his or her U.S. the person, or an individual who cohabitates or cohabitating with the person. citizenship; is an alien illegally in the United States or an alien admitted to the United States under a nonimmigrant visa; or is subject to certain restraining Question 11.i. Definition of Misdemeanor Crime of Domestic Violence: A orders. Furthermore, section 922 prohibits the shipment, transportation, or Federal, State, local, or tribal offense that is a misdemeanor under Federal, State, receipt in or affecting interstate commerce of a firearm by one who is under or tribal law and has, as an element, the use or attempted use of physical force, or indictment or information for a felony, or any other crime, punishable by the threatened use of a deadly weapon, committed by a current or former spouse, imprisonment for a term exceeding one year. parent, or guardian of the victim, by a person with whom the victim shares a child in common, by a person who is cohabitating with, or has cohabited with Question 11.b. Under Indictment or Information or Convicted in any the victim as a spouse, parent, or guardian, or by a person similarly situated to Court: An indictment, information, or conviction in any Federal, State, or a spouse, parent, or guardian of the victim. The term includes all misdemeanors local court. An information is a formal accusation of a crime verified by a that have as an element the use or attempted use of physical force or the prosecutor. threatened use of a deadly weapon (e.g., assault and battery), if the offense is committed by one of the defined parties. (See Exception to 11.c. and 11.i.) A person who has been convicted of a misdemeanor crime of domestic violence also EXCEPTION to 11.c. and 11.i.: A person who has been convicted of a is not prohibited unless: (1) the person was represented by a lawyer or gave up felony, or any other crime, for which the judge could have imprisoned the the right to a lawyer; or (2) if the person was entitled to a jury, was tried by a jury, person for more than one year, or who has been convicted of a misdemeanor or gave up the right to a jury trial. Persons subject to this exception should crime of domestic violence, is not prohibited from purchasing, receiving, or answer “no” to 11.i. possessing a firearm if: (1) under the law of

ATF Form 4473 (5300.9) Part I Page 4 of 6 Revised April 2012

Advanced Estate Planning and Administration 2016 4–38 Chapter 4—Firearms in Estate Administration

Question 11.l. An alien admitted to the United States under a nonimmigrant GCA limitations as any other firearms. See Section 921(a)(3)(b). 18 U.S.C. visa includes, among others, persons visiting the United States temporarily for Section 922(b)(1) makes it unlawful for a licensee to sell any firearm other than a business or pleasure, persons studying in the United States who maintain a shotgun or rifle to any person under the age of 21. Since a frame or receiver for a residence abroad, and certain temporary foreign workers. The definition does firearm, to include one that can only be made into a long gun, is a “firearm other NOT include permanent resident aliens nor does it apply to nonimmigrant than a shotgun or rifle,” it cannot be transferred to anyone under the age of 21. aliens admitted to the United States pursuant to either the Visa Waiver Also, note that multiple sales forms are not required for frames or receivers of any Program or to regulations otherwise exempting them from visa requirements. firearms, or pistol grip shotguns, since they are not “pistols or revolvers” under Section 923(g)(3)(a). An alien admitted to the United States under a nonimmigrant visa who responds “yes” to question 11.l. must provide a response to question 12 Question 19. Gun Shows: If sale at gun show or other qualifying event indicating whether he/she qualifies under an exception. sponsored by any national, State, or local organization, as authorized by 27 CFR § 478.100, the seller must record the name of event and the location (city and Question 12. Exceptions to the Nonimmigrant Alien Response: An alien State) of the sale in question 19. admitted to the United States under a nonimmigrant visa is not prohibited from purchasing, receiving, or possessing a firearm if the alien: (1) is in Question 20a. Identification: List issuing authority (e.g., State, County or possession of a hunting license or permit lawfully issued by the Federal Municipality) and type of identification presented (e.g., Virginia driver’s license Government, a State, or local government, or an Indian tribe federally (VA DL), or other valid government-issued identification). recognized by the Bureau of Indian Affairs, which is valid and unexpired; (2) was admitted to the United States for lawful hunting or sporting purposes; (3) Know Your Customer: Before a licensee may sell or deliver a firearm to a has received a waiver from the prohibition from the Attorney General of the nonlicensee, the licensee must establish the identity, place of residence, and United States; (4) is an official representative of a foreign government who is age of the buyer. The buyer must provide a valid government-issued photo accredited to the United States Government or the Government’s mission to an identification to the seller that contains the buyer’s name, residence address, international organization having its headquarters in the United States; (5) is and date of birth. The licensee must record the type, identification number, en route to or from another country to which that alien is accredited; (6) is an and expiration date (if any) of the identification in question 20.a. A driver’s official of a foreign government or a distinguished foreign visitor who has license or an identification card issued by a State in place of a license is been so designated by the Department of State; or (7) is a foreign law acceptable. Social Security cards are not acceptable because no address, date of enforcement officer of a friendly foreign government entering the United birth, or photograph is shown on the cards. A combination of government- States on official law enforcement business. issued documents may be provided. For example, if a U.S. citizen has two States of residence and is trying to buy a handgun in State X, he may provide a driver’s Persons subject to one of these exceptions should answer “yes” to questions license (showing his name, date of birth, and photograph) issued by State Y and 11.l. and 12 and provide documentation such as a copy of the hunting license another government-issued document (such as a tax document) from State X or letter granting the waiver, which must be recorded in 20.c. If the transferee showing his residence address. If the buyer is a member of the Armed Forces on (buyer) answered “yes” to this question, the licensee must complete 20.c. active duty acquiring a firearm in the State where his or her permanent duty station is located, but he or she has a driver’s license from another State, you The seller should verify supporting documentation provided by the purchaser should list the buyer’s military identification card and official orders showing and must attach a copy of the provided documentation to this ATF Form 4473, where his or her permanent duty station is located in response to question 20.a. Firearms Transaction Record. Question 20.b. Alternate Documentation: Licensees may accept a combination Question 13. State of Residence: The State in which an individual resides. of valid government-issued documents to satisfy the identification document An individual resides in a State if he or she is present in a State with the requirements of the law. The required valid government-issued photo identifica- intention of making a home in that State. If an individual is a member of the tion document bearing the name, photograph, and date of birth of transferee may Armed Forces on active duty, his or her State of residence also is the State in be supplemented by another valid, government-issued document showing the which his or her permanent duty station is located. transferee’s residence address. This alternate documentation should be recorded in question 20.b., with issuing authority and type of identification presented. A combination of government-issued documents may be provided. For example, if If you are a U.S. citizen with two States of residence, you should list your a U.S. citizen has two States of residence and is trying to buy a handgun in State current residence address in response to question 2 (e.g., if you are buying a X, he may provide a driver’s license (showing his name, date of birth, and firearm while staying at your weekend home in State X, you should list your photograph) issued by State Y and another government-issued document (such as address in State X in response to question 2.) a tax document) from State X showing his residence address.

Question 16. Certification Definition of Engaged in the Business: Under Question 20c. Documentation for Aliens Admitted to the United States Under 18 U.S.C. § 922 (a)(1), it is unlawful for a person to engage in the business of a Nonimmigrant Visa: See instructions for Question 11.l. Types of acceptable dealing in firearms without a license. A person is engaged in the business of documents would include a valid hunting license lawfully issued in the United dealing in firearms if he or she devotes time, attention, and labor to dealing in States or a letter from the U.S. Attorney General granting a waiver. firearms as a regular course of trade or business with the principal objective of livelihood and profit through the repetitive purchase and resale of firearms. A Question(s) 21, 22, 23, NICS BACKGROUND CHECKS: 18 U.S.C. § 922(t) license is not required of a person who only makes occasional sales, requires that prior to transferring any firearm to an unlicensed person, a licensed exchanges, or purchases of firearms for the enhancement of a personal importer, manufacturer, or dealer must first contact the National Instant Criminal collection or for a hobby, or who sells all or part of his or her personal Background Check System (NICS). NICS will advise the licensee whether the collection of firearms. system finds any information that the purchaser is prohibited by law from possessing or receiving a firearm. For purposes of this form, contacts to NICS Section B include contacts to State agencies designated to conduct NICS checks for the Federal Government. WARNING: Any seller who transfers a firearm to any Question 18. Type of Firearm(s): Check all boxes that apply. “Other” person they know or have reasonable cause to believe is prohibited from receiving refers to frames, receivers and other firearms that are not either handguns or or possessing a firearm violates the law, even if the seller has complied with the long guns (rifles or shotguns), such as firearms having a pistol grip that expel background check requirements of the Brady law. a shotgun shell, or National Firearms Act (NFA) firearms. After the buyer has completed Section A of the form and the licensee has If a frame or receiver can only be made into a long gun (rifle or shotgun), it is completed questions 18-20, and before transferring the firearm, the licensee must still a frame or receiver not a handgun or long gun. However, they still are contact NICS (read below for NICS check exceptions.) However, the licensee “firearms” by definition, and subject to the same should NOT contact NICS and should stop the transaction if: the

ATF Form 4473 (5300.9) Part I Page 5 of 6 Revised April 2012

Advanced Estate Planning and Administration 2016 4–39 Chapter 4—Firearms in Estate Administration

buyer answers “no” to question 11.a.; the buyer answers “yes” to any question Types of firearms include: pistol, revolver, rifle, shotgun, receiver, frame and in 11.b.-11.l., unless the buyer only has answered “yes” to question 11.l. and other firearms that are not either handguns or long guns (rifles or shotguns), such also answers “yes” to question 12; or the buyer is unable to provide the as firearms having a pistol grip that expel a shotgun shell or National Firearms documentation required by question 20.a, b, or c. Act (NFA) firearms.

At the time that NICS is contacted, the licensee must record in question 21.a- Additional firearms purchases by the same buyer may not be added to the form c: the date of contact, the NICS (or State) transaction number, and the initial after the seller has signed and dated it. A buyer who wishes to purchase additional response provided by NICS or the State. The licensee may record the Missing firearms after the seller has signed and dated the form must complete a new ATF Disposition Information (MDI) date in 21.c. that NICS provides for delayed Form 4473. The seller must conduct a new NICS check. transactions (States do not provide this number). If the licensee receives a “delayed” response, before transferring the firearm, the licensee must record Question 30c. This box is for the FFL’s use in recording any information he or in question 21.d. any response later provided by NICS or the State or that no she finds necessary to conduct business. resolution was provided within 3 business days. If the licensee receives a response from NICS or the State after the firearm has been transferred, he or Question 32 Federal Firearms License Number: Must contain at least the first she must record this information in question 21.e. Note: States acting as three and last five digits of the FFL number, for instance X-XX-XXXXX. points of contact for NICS checks may use terms other than “proceed,” “delayed,” “cancelled,” or “denied.” In such cases, the licensee should check Question 33-35 Transferor/Sellers Information: For “denied” and “cancelled” the box that corresponds to the State’s response. Some States may not provide NICS transactions, the person who completed Section B must complete Section a transaction number for denials. However, if a firearm is transferred within D, questions 33-35. the three business day period, a transaction number is required. Privacy Act Information NICS Responses: If NICS provides a “proceed” response, the transaction Solicitation of this information is authorized under 18 U.S.C. § 923(g). Disclo- may proceed. If NICS provides a “cancelled” response, the seller is sure of the individual’s Social Security number is voluntary. The number may be prohibited from transferring the firearm to the buyer. If NICS provides a used to verify the buyer’s identity. “denied” response, the seller is prohibited from transferring the firearm to the buyer. If NICS provides a “delayed” response, the seller is prohibited from Paperwork Reduction Act Notice transferring the firearm unless 3 business days have elapsed and, before the transfer, NICS or the State has not advised the seller that the buyer’s receipt or The information required on this form is in accordance with the Paperwork possession of the firearm would be in violation of law. (See 27 CFR § 478.102(a) Reduction Act of 1995. The purpose of the information is to determine the for an example of how to calculate 3 business days.) If NICS provides a eligibility of the transferee to receive firearms under Federal law. The informa- “delayed” response, NICS also will provide a Missing Disposition Informa- tion is subject to inspection by ATF officers and is required by 18 U.S.C. §§ 922 tion (MDI) date that calculates the 3 business days and reflects when the and 923. firearm(s) can be transferred under Federal law. States may not provide an MDI date. Please note State law may impose a waiting period on transferring The estimated average burden associated with this collection is 30 minutes per firearms. respondent or recordkeeper, depending on individual circumstances. Comments about the accuracy of this burden estimate and suggestions for reducing it should EXCEPTIONS TO NICS CHECK: A NICS check is not required if the be directed to Reports Management Officer, Document Services Section, Bureau transfer qualifies for any of the exceptions in 27 CFR § 478.102(d). Generally of Alcohol, Tobacco, Firearms and Explosives, Washington, DC 20226. these include: (a) transfers where the buyer has presented the licensee with a permit or license that allows the buyer to possess, acquire, or carry a firearm, An agency may not conduct or sponsor, and a person is not required to respond and the permit has been recognized by ATF as a valid alternative to the NICS to, a collection of information unless it displays a currently valid OMB control check requirement; (b) transfers of National Firearms Act weapons approved number. Confidentiality is not assured. by ATF; or (c) transfers certified by ATF as exempt because compliance with the NICS check requirements is impracticable. See 27 CFR § 478.102(d) for a detailed explanation. If the transfer qualifies for one of these exceptions, the licensee must obtain the documentation required by 27 CFR § 478.131. A firearm must not be transferred to any buyer who fails to provide such documentation.

Section C

Question 24 and 25. Transfer on a Different Day and Recertification: If the transfer takes place on a different day from the date that the buyer signed Section A, the licensee must again check the photo identification of the buyer at the time of transfer, and the buyer must complete the recertification in Section C at the time of transfer.

Section D

Immediately prior to transferring the firearm, the seller must complete all of the questions in Section D. In addition to completing this form, the seller must report any multiple sale or other disposition of pistols or revolver on ATF Form 3310.4 (see 27 CFR § 478.126a).

Question(s) 26, 27, 28, 29 and 30, Firearm(s) Description: These blocks should be completed with the firearm(s) information. Firearms manufactured after 1968 should all be marked with a serial number. Should you acquire a firearm that is not marked with a serial number; you may answer question 28 with “NSN” (No Serial Number), “N/A” or “None.”

If more than five firearms are involved in a transaction, the information required by Section D, questions 26-30, must be provided for the additional firearms on a separate sheet of paper, which must be attached to the ATF Form 4473 covering the transaction. ATF Form 4473 (5300.9) Part I Revised April 2012 Page 6 of 6

Advanced Estate Planning and Administration 2016 4–40 Chapter 4—Firearms in Estate Administration

CHAPTER 2. WHAT ARE “FIREARMS” UNDER THE NFA?

Section 2.1 Types of NFA firearms

The NFA defines the specific types of firearms subject to the provisions of the Act. These definitions describe the function, design, configuration and/or dimensions that weapons must have to be NFA firearms. In addition to describing the weapon, some definitions (machinegun, rifle, shotgun, any other weapon) state that the firearm described also includes a weapon that can be readily restored to fire. A firearm that can be readily restored to fire is a firearm that in its present condition is incapable of expelling a projectile by the action of an explosive (or, in the case of a machinegun, will not in its present condition shoot automatically) but which can be restored to a functional condition by the replacement of missing or defective component parts. Please be aware that case law is not specific but courts have held that the “readily restorable” test is satisfied where a firearm can be made capable of renewed automatic operation, even if it requires some degree of skill and the use of tools and parts.

2.1.1 Shotgun A shotgun is a firearm designed to be fired from the shoulder and designed to use the energy of the explosive in a fixed shotgun shell to fire through a smooth bore either a number of projectiles or a single projectile for each pull of the trigger.10 A shotgun subject to the NFA has a barrel or barrels of less than 18 inches in length. | 15 inches _ |

The ATF procedure for measuring barrel length is to measure from the closed bolt (or breech-face) to the furthermost end of the barrel or permanently attached muzzle device. Permanent methods of attachment include full-fusion gas or electric steel-seam welding, high-temperature (1100°F) silver soldering, or blind pinning with the pin head welded over. Barrels are measured by inserting a dowel rod into the barrel until the rod stops against the bolt or breech-face. The rod is then marked at the furthermost end of the barrel or permanently attached muzzle device, withdrawn from the barrel, and measured.

10 26 U.S.C. 5845(d)

Advanced Estate Planning and Administration 2016 4–41 Chapter 4—Firearms in Estate Administration

2.1.2 Weapon made from a shotgun. A weapon made from a shotgun is a shotgun type weapon that has an overall length of less than 26 inches or a barrel or barrels of less than 18 inches in length.

| 25 inches _ |

The overall length of a firearm is the distance between the muzzle of the barrel and the rearmost portion of the weapon measured on a line parallel to the axis of the bore.

2.1.3 Rifle. A rifle is a firearm designed to be fired from the shoulder and designed to use the energy of an explosive in a fixed cartridge to fire only a single projectile through a rifled barrel for each single pull of the trigger.11 A rifle subject to the NFA has a barrel or barrels of less than 16 inches in length.

| 12 inches ______|

11 26 U.S.C. 5845(c)

Advanced Estate Planning and Administration 2016 4–42 Chapter 4—Firearms in Estate Administration

2.1.4 Weapon made from a rifle. A weapon made from a rifle is a rifle type weapon that has an overall length of less than 26 inches or a barrel or barrels of less than 16 inches in length.

| 18 inches ______|

The overall length of a firearm is the distance between the muzzle of the barrel and the rearmost portion of the weapon measured on a line parallel to the axis of the bore.

2.1.5 Any other weapon. Firearms meeting the definition of “any other weapon” are weapons or devices capable of being concealed on the person from which a shot can be discharged through the energy of an explosive. Many “any other weapons” are disguised devices such as penguns, cigarette lighter guns, knife guns, cane guns and umbrella guns.

pengun

knife gun

umbrella gun

Also included in the “any other weapon” definition are pistols and revolvers having smooth bore barrels designed or redesigned to fire a fixed shotgun shell.

Advanced Estate Planning and Administration 2016 4–43 Chapter 4—Firearms in Estate Administration

H&R Handy Gun

Ithaca Auto & Burglar Gun

While the above weapons are similar in appearance to weapons made from shotguns, they were originally manufactured in the illustrated configuration and are not modified from existing shotguns. As a result, these weapons do not fit within the definition of shotgun12 or weapons made from a shotgun13.

The “any other weapon” definition also includes specifically described weapons with combination shotgun and rifle barrels 12 inches or more but less than 18 inches in length from which only a single discharge can be made from either barrel without manual reloading. The firearm most commonly associated with this portion of the definition is the Marble’s Game Getter.

Marble’s Game Getter

12 26 U.S.C. 5845(d) 13 26 U.S.C. 5845(a)(2)

Advanced Estate Planning and Administration 2016 4–44 Chapter 4—Firearms in Estate Administration

NOTE: One version of the Marble’s Game Getter was produced with 18-inch barrels and a folding shoulder stock. This model of the Game Getter, as manufactured, is not subject to the provisions of the NFA because it has barrels that are 18 inches in length and the overall length of the firearm, with stock extended, is more than 26 inches. However, if the shoulder stock has been removed from the 18-inch barrel version of the Game Getter, the firearm has an overall length of less than 26 inches and is an NFA weapon. Specifically, the firearm is classified as a weapon made from a rifle/shotgun.

The “any other weapon” definition excludes weapons designed to be fired from the shoulder that are not capable of firing fixed ammunition or a pistol or revolver having a rifled bore. However, certain alterations to a pistol or revolver, such as the addition of a second vertical handgrip, create a weapon that no longer meets the definition of pistol or revolver.14 A pistol or revolver modified as described is an “any other weapon” subject to the NFA because the weapon is not designed to be fired when held in one hand.

semiautomatic pistol with second vertical handgrip

As stated above, a pistol or revolver having a rifled bore does not meet the definition of “any other weapon” and is not subject to the NFA. It is important to note that any pistol or revolver having a barrel without a rifled bore does not fit within the exclusion and is an “any other weapon” subject to the NFA.

2.1.6 Machinegun. Firearms within the definition of machinegun include weapons that shoot, are designed to shoot, or can be readily restored to shoot, automatically more than one shot without manual reloading by a single function of the trigger.

14 27 CFR 479.11

Advanced Estate Planning and Administration 2016 4–45 Chapter 4—Firearms in Estate Administration

STEN MK II submachinegun The definition of machinegun also includes the frame or receiver of a machinegun.

STEN MK II submachinegun receiver

Of all the different firearms defined as NFA weapons, machineguns are the only type where the receiver of the weapon by itself is an NFA firearm. As a result, it is important that the receiver of a machinegun be properly identified. Many machineguns incorporate a “split” or “hinged” receiver design so the main portion of the weapon can be easily separated into upper and lower sections. Additionally, some machineguns utilize a construction method where the receiver is composed of a number of subassemblies that are riveted together to form the complete receiver.

The following table lists specific models of machineguns incorporating the above designs and the portion of the weapon that has been held to be the receiver. This list is not all- inclusive. For information concerning a split or hinged receiver type machinegun not listed below, contact FTB at (304) 260-1699.

Model Receiver Armalite AR10 lower Armalite AR15 (all variations) lower Armalite AR18 lower Beretta AR70 lower British L1A1 upper Browning M1917 right side plate Browning M1919 (all variations) right side plate Browning M2 & M2HB right side plate Colt M16 (all variations) lower Czech Vz 61 lower FN FNC lower Model Receiver FN CAL upper FN FAL upper

Advanced Estate Planning and Administration 2016 4–46 Chapter 4—Firearms in Estate Administration

French MAT 49 upper German MP38 & MP40 upper H&K G3 (all variations) upper H&K MP5 (all variations) upper IMI UZI upper M61 Vulcan outer housing M134 Minigun outer housing Maxim MG08 and 08/15 right side plate SIG AMT upper SIG STG 57 upper SIG 550 Series (all variations) upper Soviet PPsH 41 upper Soviet PPS 43 upper Steyr MPi 69 upper Steyr MPi 81 upper Thompson submachinegun (all variations) upper Vickers water cooled machineguns right side plate

The “designed to shoot automatically more than one shot without manual reloading by a single function of the trigger” portion of the definition relates to the characteristics of the weapon that permit full automatic fire. ATF has also held that the “designed” definition includes those weapons which have not previously functioned as machineguns but possess design features which facilitate full automatic fire by simple modification or elimination of existing component parts. ATF has published rulings concerning specific firearms classified as machineguns based on this interpretation of the term “designed.”15

Included within the definition of machinegun is any part designed and intended solely and exclusively, or combination of parts designed and intended, for use in converting a weapon into a machinegun. This portion of the machinegun definition addresses what are commonly referred to as conversion kits. The “any part designed and intended solely and exclusively” language refers to a part that was produced for no other reason than to convert a weapon into a machinegun. Illustrated below are examples of such parts.

conversion sear for H&K semiautomatic firearms

15 Appendix B (ATF Rulings 82-2, 82-8, 83-5)

Advanced Estate Planning and Administration 2016 4–47 Chapter 4—Firearms in Estate Administration

Drop in Auto Sear for AR15 type semiautomatic firearms

The above parts are designed solely and exclusively for use in converting a weapon into a machinegun and are classified as machineguns.

The “combination of parts designed and intended for use in converting a weapon into a machinegun” language refers to a group of parts designed and intended to be used in converting a weapon into a machinegun. A typical example is those M2 carbine parts that are only used to permit fully automatic fire in a US Carbine M1 or M2.

M2 Carbine conversion kit

The above parts consisting of an M2 selector lever, selector lever spring, disconnector lever assembly, M2 disconnector, disconnector spring, disconnector plunger and M2 hammer are classified as a machinegun. These parts are used specifically for fully automatic fire and have no application in a semiautomatic carbine. While other parts such as an M2 sear, operating slide, trigger housing and stock are used in the fully automatic carbine, these parts are also appropriate for use in semiautomatic M1 carbines.16

Therefore, the M2 sear, operating slide, trigger housing and stock are not a combination of parts designed and intended for use in converting a weapon into a machinegun. Other commonly encountered

16 TM9-1267, Cal. .30 Carbines M1, M1A1, M2, and M3, United States Government Printing Office, 1953

Advanced Estate Planning and Administration 2016 4–48 Chapter 4—Firearms in Estate Administration

conversion kits include modified trigger housings and/or trigger paks for Heckler & Koch (HK) type semiautomatic firearms. As originally manufactured, semiautomatic HK firearms (HK, 41, 43, 91, 93 and SP89) were specifically designed such that they will not accept fully automatic trigger housings or trigger paks for HK selective fire weapons such as the G3 and MP5. If selective fire trigger paks or trigger housings are modified so that they will function with semiautomatic HK firearms, the modified components are classified as parts designed and intended solely and exclusively, or combination of parts designed and intended for use in converting a weapon into a machinegun. These modified parts are also machineguns as defined.

The following illustration shows a selective fire HK trigger pak with a selective fire trigger housing that has been modified to function with a HK semiautomatic firearm by removing the forward pivot point or “ears” from the trigger housing.

modified HK selective fire trigger housing

Illustrated below is a selective fire HK trigger pak that has been modified by notching the forward lower corner of the pak so that it will fit into a standard semiautomatic HK trigger housing.

modified HK selective fire trigger pak

NOTE: standard selective fire HK trigger housings and trigger paks as originally manufactured are component parts for machineguns. These unmodified parts, in and of themselves, are not subject to the NFA. However, when adapted to function with a semiautomatic HK firearm the modified parts have been redesigned and are intended for use in converting a weapon into a machinegun.

Advanced Estate Planning and Administration 2016 4–49 Chapter 4—Firearms in Estate Administration

The following illustration shows a semiautomatic HK trigger pak with HK conversion sear installed.

HK semiautomatic trigger pak with conversion sear installed

For the conversion sear to function the trigger or the trigger pak must be modified to increase the rearward travel of the trigger. When the trigger is modified a notch is cut into the trailing leg to provide more travel before the trigger contacts the upper trigger stop. When the trigger pak is modified, the upper trigger stop is either removed or relocated. IMPORTANT NOTE: should the conversion sear be removed from the trigger pak and the modified pak left in the firearm, the weapon will still be capable of fully automatic fire. Therefore, it is important that registered HK conversion sears be kept with their respective trigger paks. This is particularly important in instances where HK type firearms are sold as being “sear ready” or “sear host guns”. If these weapons contain semiautomatic trigger paks modified to function with conversion sears the firearms are capable of fully automatic fire (without the conversion sear) and as such are machineguns as defined.

Concerning the installation of conversion kits in semiautomatic firearms, it must be pointed out that the receiver of the firearm may not be modified to permit fully automatic fire. Such modification results in the making of a machinegun which is prohibited by 18 U.S.C. 922(o).

The definition of machinegun also includes a combination of parts from which a machinegun can be assembled if such parts are in the possession or under the control of a person. An example of a firearm meeting this section of the definition is a semiautomatic AR15 rifle possessed with an M16 bolt carrier, hammer, trigger, disconnector and selector. If the semiautomatic AR15 is assembled with the described M16 parts and the rifle is capable of fully automatic fire, the weapon possessed in conjunction with the M16 parts, whether assembled or not, is a machinegun as defined.17

17 ATF P 5300.4 (9/05), Federal Firearms Regulations Reference Guide – 2005, p. 155

Advanced Estate Planning and Administration 2016 4–50 Chapter 4—Firearms in Estate Administration

An additional example of a combination of parts from which a machinegun can be assembled is a STEN submachinegun “parts kit” possessed with a length of metal tube to be used as a replacement receiver and instructions for assembling the parts into a functional machinegun. The parts kit as sold does not contain a firearm receiver although remnants of the destroyed receiver may be present. A machinegun parts kit in this condition is not subject to the GCA or the NFA.

Unfinished receiver tubes with instructions and/or templates for use in the assembly of a functional machinegun are also commercially available. These tubes with instructions/templates, in and of themselves, are not subject to the GCA or NFA.

When the parts kit is possessed in conjunction with the above described unfinished receiver tube, a combination of parts from which a machinegun can be assembled exists and is a machinegun as defined.

2.1.7 Silencer. A firearm silencer and a firearm muffler are defined as any device for silencing, muffling, or diminishing the report of a portable firearm.18 Firearm silencers are generally composed of an outer tube, internal baffles, a front end cap, and a rear end cap.

complete firearm silencer

The definition of a silencer also includes any combination of parts, designed or redesigned, and intended for use in assembling or fabricating a firearm silencer or firearm muffler.

The following illustration depicts parts that are designed and intended for use in assembling a firearm silencer. Another example of parts redesigned and intended for use in assembling or fabricating a firearm silencer are automotive engine freeze plugs that have been modified by drilling a hole through their center to permit passage of a bullet.

silencer parts

18 18 U.S.C. 921(a)(24)

Advanced Estate Planning and Administration 2016 4–51 Chapter 4—Firearms in Estate Administration

Also included within the silencer definition is any part intended only for use in the assembly or fabrication of a firearm silencer.

silencer baffle

Any of the above illustrated components meet the definition of a firearm silencer and are subject to the NFA. NOTE: the language in the definition of silencer contains no provisions that permit an owner of a registered silencer to possess spare or replacement components for the silencer. However, licensed manufacturers who are SOTs may possess spare silencer components in conjunction with their manufacturing operations.

2.1.8 Destructive device. The destructive device definition contains different categories that address specific types of munitions. Each category describes the devices subject to the definition based on the material contained in the item, the dimensions of the bore of certain weapons, and a combination of parts for use in converting the described items into destructive devices.

2.1.8.1 Explosive devices. The first portion of the definition deals with explosive, incendiary and poison gas munitions. The definition specifies that any explosive, incendiary or poison gas bomb, grenade, mine or similar device is a destructive device.

explosive bomb

explosive grenade

Advanced Estate Planning and Administration 2016 4–52 Chapter 4—Firearms in Estate Administration

This portion of the definition includes a rocket having a propellant charge of more than four ounces and a missile (projectile) having an explosive or incendiary charge of more than one- quarter ounce.

rocket with more than 4 ounces of propellant

| projectile |

NOTE: Missiles (projectiles) less than caliber 20mm generally are not large enough to accommodate more than one-quarter ounce of explosive or incendiary material. In the case of 20mm high explosive (HE) or high explosive incendiary (HEI) projectiles, it is imperative to determine the model designation of the specific item as some 20mm HE and HEI projectiles contain more than one-quarter ounce of explosive or incendiary material and are destructive devices. Other 20mm HE and HEI projectiles do not contain more than one-quarter ounce of explosive and are not destructive devices. Therefore, it is incumbent upon persons interested in 20mm HE and HEI ammunition to determine the amount of explosives contained in a specific projectile. HE and HEI missiles (projectiles) larger than 20mm generally contain more than one- quarter ounce of explosive or incendiary material and are destructive devices.

2.1.8.2 Large caliber weapons. The second section of the definition states that any type of weapon by whatever name known which will, or which may be readily converted to, expel a projectile by the action of an explosive or other propellant, the barrel or barrels of which have a bore diameter of more than one-half inch in diameter is a destructive device. This portion of the definition specifically excludes a shotgun or shotgun shell which the Attorney General finds is generally recognized as particularly suitable for sporting purposes. ATF has issued rulings classifying specific shotguns as destructive devices because they have a bore of more than one half inch in diameter and were found to not be particularly suitable forfor sporting purposes.19

The majority of weapons covered by this portion of the destructive device definition are large caliber military weapons such as rocket launchers, mortars and cannons.

19 Appendix B (ATF Rulings 94-1, 94-2)

Advanced Estate Planning and Administration 2016 4–53 Chapter 4—Firearms in Estate Administration

RPG 7 launcher (bore diameter 1.57 inches)

120mm mortar (bore diameter 4.7 inches)

It is important to note that the large caliber firearms covered by this section are defined as weapons that expel a projectile by the action of an explosive or other propellant. This is the only place in the GCA and NFA where a propellant other than an explosive must be considered when classifying a weapon. Examples of weapons having a bore diameter of more than one-half inch in diameter and that expel a projectile by means other than an explosive are mortars that utilize compressed air as a propellant and some rocket launchers.

Certain destructive devices may also meet the definition of machinegun because in addition to having a bore diameter of more than one-half inch the weapons are capable of fully automatic fire. ATF treats NFA firearms of this type as both machineguns and destructive devices. The weapons are coded as machineguns in the NFRTR with an annotation that they are also destructive devices. Any such weapons manufactured on or after May 19, 1986 are subject to 18 U.S.C. 922(o). In instances where a weapon of this type is being transferred, it is imperative that State and local laws where the weapon is being transferred do not prohibit possession of destructive devices or machineguns.

Advanced Estate Planning and Administration 2016 4–54 Chapter 4—Firearms in Estate Administration

M61 20mm full automatic cannon

In addition to defining destructive devices, the definition also specifically excludes certain items from that classification. As previously stated, any shotgun or shotgun shell which the Attorney General finds is generally recognized as particularly suitable for sporting purposes is not a destructive device. Additionally, the following items are also excluded from the definition:

x Any device which is neither designed nor redesigned for use as a weapon.

x Any device, although originally designed for use as a weapon, which is redesigned for use as a signaling, pyrotechnic, line throwing, safety or similar device.

x Surplus ordnance sold, loaned or given by the Secretary of the Army pursuant to the provisions of 10 U.S.C. 4684(2), 4685, or 4686.

x Any other device which the Attorney General finds is not likely to be used as a weapon, or is an antique, or is a rifle which the owner intends to use solely for sporting purposes.

It should not be assumed that any device meeting the above descriptions is automatically excluded from the definition of a destructive device. ATF has ruled that certain pyrotechnic devices are destructive devices.20 ATF should be contacted to confirm the classification of any items that appear to meet the above exclusions. Additionally, many of the items excluded from the definition of destructive device may contain a firearm receiver and would still be a firearm as defined in the GCA.

2.1.9 Unserviceable firearm. An unserviceable firearm is a firearm that is incapable of discharging a shot by the action of an explosive and is incapable of being readily restored to a firing condition. The most common method for rendering a firearm unserviceable, and that recommended by ATF, is to weld the chamber of the barrel closed and weld the barrel to the receiver.21 The chamber of the barrel should be plug welded closed and all welds should be full fusion, deep penetrating, and gas or electric steel welds. In instances where the above procedure cannot be employed to render a firearm unserviceable, FTB should be contacted for alternate methods.

It is important to remember that rendering a firearm unserviceable does not remove it from the definition of an NFA firearm. An unserviceable NFA firearm is still subject to the import, registration, and transfer provisions of the NFA. However, there is no tax imposed on the transfer of an unserviceable

20 Appendix B (ATF Ruling 95-3) 21 ATF Form 5 (5320.5), Instruction 6a

Advanced Estate Planning and Administration 2016 4–55 Chapter 4—Firearms in Estate Administration

firearm as a “curio or ornament.” See 26 U.S.C. 5852(e). NOTE: “curio or ornament” is only descriptive of unserviceable firearms transferred exempt from transfer tax. An unserviceable firearm transferred as a “curio or ornament” is not necessarily a “curio or relic” firearm for purposes of the GCA unless the weapon is classified as a curio or relic under the GCA. For further information on curio or relic classification see section 2.2.

Section 2.2 Antique firearm. Firearms defined by the NFA as “antique firearms” are not subject to any controls under the NFA.22 The NFA defines antique firearms based on their date of manufacture and the type of ignition system used to fire a projectile. Any firearm manufactured in or before 1898 that is not designed or redesigned for using rimfire or conventional center fire ignition with fixed ammunition is an antique firearm. Additionally, any firearm using a matchlock, flintlock, percussion cap or similar type ignition system, irrespective of the actual date of manufacture of the firearm, is also an antique firearm.

NFA firearms using fixed ammunition are antique firearms only if the weapon was actually manufactured in or before 1898 and the ammunition for the firearm is no longer manufactured in the United States and is not readily available in the ordinary channels of commercial trade. To qualify as an antique firearm, a fixed cartridge firing NFA weapon must meet both the age and ammunition availability standards of the definition.

Concerning ammunition availability, it is important to note that a specific type of fixed ammunition that has been out of production for many years may again become available due to increasing interest in older firearms. Therefore, the classification of a specific NFA firearm as an antique can change if ammunition for the weapon becomes readily available in the ordinary channels of commercial trade.

Section 2.3 Curios or relics. Curios or relics are firearms that are of special interest to collectors.23 NFA firearms can be classified as curios or relics under the same criteria used to classify conventional firearms as curios or relics.24

An NFA firearm that is recognized as a curio or relic is still an NFA “firearm” and is still subject to the registration and transfer provisions of the NFA. The primary impact of a curio or relic classification is that a properly registered NFA firearm classified as a curio or relic may be lawfully transferred interstate to, or received interstate by, a person licensed as a collector of curios or relics under the GCA.

Section 2.4 Applications to remove firearms from the scope of the NFA as collector’s items.

Certain NFA weapons can be removed from the provisions of the NFA as collector’s items.25 The procedures for requesting removal of an NFA firearm are the same as used for requesting a destructive device determination.26

22 26 U.S.C. 5845(a), (g) 23 27 CFR 478.11 24 27 CFR 478.26 25 26 U.S.C. 5845(a) 26 27 CFR 479.24 - 479.25

Advanced Estate Planning and Administration 2016 4–56 Chapter 4—Firearms in Estate Administration

An NFA firearm removed from the NFA as a collector’s item is no longer subject to any of the provisions of the NFA. In most cases, the weapon will still be a firearm as defined in the GCA and subject to regulation under the GCA. In some situations, the weapon that is removed from the NFA as a collector’s item will be an antique firearm as defined in the GCA.27 In these instances, the weapon would no longer be a firearm as defined in Federal law.

The Attorney General does not have the authority to remove a machinegun or a destructive device from the provisions of the NFA as collector’s items.28 Therefore, applications to remove machineguns or destructive devices from the NFA as collector’s items cannot be approved.

Section 2.5 Removal of firearms from the scope of the NFA by modification/elimination of components.

Firearms, except machineguns and silencers, that are subject to the NFA fall within the various definitions due to specific features. If the particular feature that causes a firearm to be regulated by the NFA is eliminated or modified, the resulting weapon is no longer an NFA weapon.

For example, a shotgun with a barrel length of 15 inches is an NFA weapon. If the 15- inch barrel is removed and disposed of, the remaining firearm is not subject to the NFA because it has no barrel. Likewise, if the 15 inch barrel is modified by permanently attaching an extension such that the barrel length is at least 18 inches and the overall length of the weapon is at least 26 inches, the modified firearm is not subject to the NFA. NOTE: an acceptable method for permanently installing a barrel extension is by gas or electric steel seam welding or the use of high temperature silver solder having a flow point of 1100 degrees Fahrenheit.

A shot pistol (“any other weapon”) such as an H&R Handy Gun may be removed from the NFA by either disposing of the smooth bore barrel or permanently installing a rifled sleeve chambered to accept a standard pistol cartridge into the smooth bore barrel. Modified by sleeving the barrel, an H&R Handy Gun is no longer an NFA weapon because it now has a rifled bore.

Large caliber destructive devices that are not also machineguns can be removed from the NFA by disposing of the barrel. If the barrel of a 37mm cannon is removed and disposed of, the remaining weapon has no barrel or bore diameter. As an alternative, the barrel of a destructive device may be functionally destroyed. To destroy the barrel of a destructive device the following operations must be performed:

x Cut a hole, equal to the diameter of the bore, on a 90-degree angle to the axis of the bore, through one side of the barrel in the high pressure (chamber) area. x Weld the barrel to the receiver of the weapon. x Weld an obstruction into the barrel to prevent the introduction of a round of ammunition.

2.5.1 Removal of machineguns and silencers from the scope of the NFA. Machineguns are defined to include the receiver of a machinegun and the definition of silencer includes each component of a

27 18 U.S.C. 921(a)(16) 28 26 U.S.C. 5845(a)

Advanced Estate Planning and Administration 2016 4–57 Chapter 4—Firearms in Estate Administration

silencer. Therefore, to remove these weapons from the provisions of the NFA, the receiver of a machinegun or all the components of a silencer must be destroyed.

The preferred method for destroying a machinegun receiver is to completely sever the receiver in specified locations by means of a cutting torch that displaces at least one-quarter inch of material at each cut location. ATF has published rulings concerning the preferred destruction of specific machineguns.29

A machinegun receiver may also be properly destroyed by means of saw cutting and disposing of certain removed portions of the receiver. To ensure that the proposed saw cutting of a particular machinegun receiver is acceptable, FTB should be contacted for guidance and approval of any alternative destruction proposal. Note: a machinegun receiver that is not properly destroyed may still be classified as a machinegun, particularly in instances where the improperly destroyed receiver is possessed in conjunction with other component parts for the weapon.

A silencer may be destroyed by completely severing each component by means of a cutting torch that has a tip of sufficient size to displace at least one-quarter inch of material at each cut location.

Concerning the outer tube(s) of a silencer, these components may be destroyed by crushing them flat in lieu of cutting with a torch.

Anyone interested in destroying an NFA weapon by means other than described above should contact FTB to discuss possible alternatives.

29 Appendix B (ATF Rulings 2003-1, 2003-2, 2003-3, 2003-4)

Advanced Estate Planning and Administration 2016 4–58 Chapter 4—Firearms in Estate Administration

CHAPTER 9. TRANSFERS OF NFA FIREARMS

Section 9.1 Definition of “transfer.” The term “transfer” is broadly defined by the NFA to include “selling, assigning, pledging, leasing, loaning, giving away, or otherwise disposing of” an NFA firearm.165 The lawful transfer of an NFA firearm generally requires the filing of an appropriate transfer form with ATF, payment of any transfer tax imposed, approval of the form by ATF, and registration of the firearm to the transferee in the NFRTR. Approval must be obtained before a transfer may be made. See Section 9.5 for a discussion of certain NFA transactions not considered by ATF to be “transfers.”

Section 9.2 Only previously registered firearms may be lawfully transferred. ATF will not approve the transfer of an NFA firearm unless it has been registered to the transferor in the NFRTR. NFA firearms may only be registered upon their lawful making, manufacture, or importation, or upon the transfer of firearms already registered. Generally, unregistered firearms may not be lawfully received, possessed, or transferred. They are contraband subject to seizure and forfeiture. Violators are also subject to criminal prosecution. However, see Sections 2.4 and 3.3 on removing NFA firearms from the scope of the NFA because of their status as collectors’ items, modification, or elimination of certain component parts.

Section 9.3 Interstate transfers of NFA firearms. ATF will not approve the transfer of an NFA firearm to a non-FFL/SOT residing in a State other than the State in which the transferor’s licensed business is located or the transferor resides. Such interstate transfers would violate the GCA. However, See section 9.5.4 regarding the custody of firearms by employees of FFLs/SOTs.

Section 9.4 ATF forms for use in transferring NFA firearms

9.4.1 ATF Form 3. Transfers by FFLs/SOTs to other FFLs/SOTs require the filing of ATF Forms 3, Application for Tax Exempt Transfer and Registration of a Firearm, to register firearms to the transferees.166 See also Section 3.2.6.4. Appendix C contains a copy of the form. In these transactions, transferors have no liability for the transfer tax. As previously stated, Forms 3 must be approved by ATF before transfers may be made.

9.4.2 ATF Form 4. Forms 4, Application for Tax Paid Transfer and Registration of a Firearm, are for use in transferring serviceable NFA firearms in the following instances: transfers by non-FFLs/SOTs to other such persons; transfers by non-FFLs/SOTs to FFLs/SOTs; and transfers by FFLs/SOTs to non- FFLs/SOTs.167 Appendix C contains a copy of the form. See also Sections 3.2.6.1 through 3.2.6.3. These transfers are subject to the NFA transfer tax, so the forms must be accompanied by the appropriate tax payment. Forms 4 transferring firearms to individuals other than FFLs/SOTs must also be accompanied by transferees’ fingerprints and photographs on FBI Forms FD-258. If the individual’s receipt or possession of the firearm would violate Federal, State, or local law, the form would be disapproved. In addition, an individual transferee must have an appropriate law enforcement official execute the certification on the form.168 See Section 9.8 for more information on law enforcement

165 26 U.S.C. 5845(j) 166 27 CFR 479.88(b) 167 27 CFR 479.84 168 27 CFR 479.85

Advanced Estate Planning and Administration 2016 4–59 Chapter 4—Firearms in Estate Administration

certifications. Forms 4 must be approved by ATF before the transfers may be made. The completed Form 4, in duplicate, with fingerprint cards, photographs of the transferee, and payment of the applicable transfer tax should be mailed to:

National Firearms Act Branch Bureau of Alcohol, Tobacco, Firearms and Explosives P.O. Box 530298 Atlanta, GA 30353-0298

Payment of the transfer tax is to be in the form of a check or money order payable to the Bureau of Alcohol, Tobacco, Firearms and Explosives.

9.4.2.1 Copies of transferees’ State or local licenses or permits. If State or local law requires the transferee to have a State or local license or permit to possess the firearm and the requirement is imposed upon the person prior to receipt, the Form 4 application should also be accompanied by a copy of the license or permit.

9.4.2.2 Transfers of NFA firearms to persons other than an individual or an FFL and special (occupational) taxpayer. Section 479.85 of the Code of Federal Regulations requires the ATF Form 4 or Form 5 application to properly identify the transferee. Although transfers to natural persons (individuals) must include a recent photograph, duplicate fingerprint cards, and a certification from law enforcement, the NFA also defines a person to include a partnership, company, association, trust, estate, or corporation. The requirements for fingerprints, photographs, and the law enforcement certificate specified in § 479.85 are not applicable for transferee who is not an individual.

When an ATF Form 4 or Form 5 application is submitted to transfer a firearm to a partnership, company, association, trust, estate, or corporation (collectively, an entity), the transferee entity must be identified on the Form 4 using the complete, formal name of the entity, along with the entity’s street address, city, and state. The Form 4 or Form 5 must not include an individual’s proper name, unless the proper name is a part of the entity’s name (e.g., The Irrevocable Trust of John Doe, John Smith, Inc., etc.). ATF requires that the Form 4 or Form 5 include documentation evidencing the existence of the entity. This documentation would include, without limitation, partnership agreements, articles of incorporation, corporate registration, a complete copy of the declaration of trust, schedules or attachments referenced in the trust, etc. If the firearm being transferred is a machinegun, short barreled rifle, short barreled shotgun, or destructive device and the transfer is from an FFL, a person authorized to act on behalf of the entity must complete item 15 of the Form 4 and Form 5.

Please see section 9.12 for information regarding the NICS background check. . 9.4.3 ATF Form 5. Transferors of NFA firearms to government entities, Federal, State, or local, must file ATF Forms 5, Application for Tax Exempt Transfer and Registration of a Firearm, to transfer the firearms to such entities.169 (Note: The applicant may wish to include details regarding the receiving

169 27 CFR 479.90

Advanced Estate Planning and Administration 2016 4–60 Chapter 4—Firearms in Estate Administration

agency if the agency is obscure. Note also that there are no transfers to task forces.) Although Forms 5 are generally required to be filed and approved for transfer of firearms to U.S. agencies, firearms owned or possessed by Federal agencies are not required to be registered. Appendix C contains a copy of the form. In these transactions, the transferor has no liability for the transfer tax. As previously stated, the form must be approved by ATF before the transfer may be made. As discussed in more detail below, Forms 5 are also used to transfer unserviceable firearms tax free, transfer firearms to FFLs for repair and for their return, and for distribution of estate firearms to lawful heirs.

Section 9.5 Conveyances of NFA firearms not treated as “transfers” under the NFA

9.5.1 Repair of firearms. ATF does not consider the temporary conveyance of an NFA firearm to an FFL for repair to be a “transfer” under the NFA. Thus, a transfer application is not required to convey the firearm for repair or to return the repaired firearm to its owner/possessor. Nevertheless, in order to avoid any appearance that a “transfer” has taken place, ATF recommends that a Form 5 application be submitted for approval prior to conveying the firearm for repair. It is also recommended that the FFL making repairs obtain an approved Form 5 to return a repaired firearm. If Forms 5 are not used to convey a firearm for repair or return the repaired firearm to the owner, the parties should maintain documentation showing that the conveyance was for purposes of repair, identifying the firearm, and showing the anticipated time for repair. Approved Forms 5, or the recommended documentation, will show that an unlawful “transfer” did not take place and that the FFL making the repairs is not in unlawful possession of the firearm. A non-FFL who proposes to transport a destructive device, machinegun, or short-barrel shotgun or rifle interstate to an FFL for repair should first obtain an approved ATF Form 5320.20 before transporting the firearm.170

9.5.1.1 Repair of firearm silencers. ATF published FAQs on April 17, 2008, regarding the repair and replacement of silencers and silencer components. These FAQs are published on the ATF website and are included in Appendix B.

9.5.2 Possession of firearms by employees of FFLs/SOTs for employers’ business purposes. No “transfer” under the NFA occurs when an FFL/SOT permits a bona fide employee to take custody of its registered NFA firearms for purposes within the employee’s scope of employment and for the business purposes of the FFL/SOT. Therefore, no approved ATF transfer form is required when employees take custody of firearms under these circumstances. In addition, the interstate delivery of a firearm to the employee and the employee’s receipt of the firearm would not violate the GCA.

9.5.3 Distribution of estate firearms. A decedent’s registered NFA firearms may be conveyed tax- exempt to lawful heirs. These distributions are not treated as voluntary “transfers” under the NFA. Rather, they are considered to be involuntary “transfers by operation of law.” Under this concept, ATF will honor State court decisions relative to the ownership and right to possess NFA firearms. So, when State courts authorize the distribution of estate firearms to decedents’ lawful heirs, ATF will approve the distribution and registration to the heirs if the transactions are otherwise lawful. A lawful heir is anyone named in the decedent’s will or, in the absence of a will, anyone entitled to inherit under the laws of the State in which the decedent last resided.

170 18 U.S.C. 922(a)(4); 27 CFR 478.28

Advanced Estate Planning and Administration 2016 4–61 Chapter 4—Firearms in Estate Administration

9.5.3.1 Distributions to heirs. Although these distributions are not treated as “transfers” for purposes of the NFA, Form 5 must be filed by an executor or administrator to register a firearm to a lawful heir and the form must be approved by ATF prior to distribution to the heir. The form should be filed as soon as possible. However, ATF will allow a reasonable time to arrange for the transfer. This generally should be done before probate is closed. When a firearm is being transferred to an individual heir, his or her fingerprints on FBI Forms FD-258 must accompany the transfer application. The application will be denied if the heir’s receipt or possession of the firearm would violate Federal, State, or local law. The law enforcement certification on the form need not be completed. The form should also be accompanied by documentation showing the executor’s or administrator’s authority to distribute the firearm as well as the heir’s entitlement to the firearm. Distributions to heirs should not be made until Forms 5 are approved. Executors and administrators are not required to have estate firearms registered to them prior to distribution to lawful heirs.

9.5.3.2 Distributions to persons outside the estate. Distributions of NFA firearms by executors or administrators to persons outside the estate (not beneficiaries) are “transfers” under the NFA and require an ATF-approved transfer form. Transfers of serviceable firearms to other entities or persons require an approved Form 4. Form 4 applications must be accompanied by the applicable transfer tax, and, if the transferee is an individual, the transferee’s fingerprints on FBI Forms FD-258. Applications will be denied if transferees’ receipt or possession of the firearms would violate Federal, State, or local law. Also, Form 4 applications to transfer firearms to individuals must contain the law enforcement certification of an appropriate law enforcement official. See Section 9.8 for further information on these certifications. Form 4 applications to transfer firearms to non-FFLs residing outside the State in which the estate is being administered will be denied. Form 4 transfers should not be made until the transfers are approved.

9.5.3.3 Uncertainty about the registration status of decedents’ firearmsIn some cases, an executor or administrator of an estate may be uncertain whether the decedent’s firearms are registered to the decedent in the NFRTR. Perhaps the executor or administrator is unable to locate the decedent’s registration documents. As discussed in Section 9.2, if the decedent’s firearms are not registered to him/her in the NFRTR, the firearms are contraband and may not be lawfully possessed or transferred. If the executor or administrator cannot locate the decedent’s registration documents, he/she should contact the NFA Branch in writing and inquire about the firearms’ registration status. This inquiry should be accompanied by documents showing the executor’s or administrator’s authority under State law to represent the decedent and dispose of the decedent’s firearms. Although ATF is generally prohibited from disclosing tax information, including the identity of persons to whom NFA firearms are registered, ATF may disclose such information to persons lawfully representing registrants of NFA firearms.

9.5.3.4 Unregistered estate firearms. Should an estate contain NFA firearms not registered to the decedent, these firearms are contraband that may not be lawfully possessed or transferred. Where these are found within an estate, the executor or administrator should contact his/her local ATF office and arrange for their disposal.

Advanced Estate Planning and Administration 2016 4–62 Chapter 4—Firearms in Estate Administration

9.5.3.5 Distribution of decedents’ “sales samples.” If NFA firearms in a decedent’s estate are “sales samples,” that is, they were imported and distributed to the decedent as sales samples or were domestically manufactured machineguns distributed to the decedent as sales samples, the sale sample restriction continues in effect and lawful possession of the firearms requires that the firearms be held as “sales samples” for demonstration to government agencies.171 Therefore, these firearms within an estate must be transferred to government agencies or FFLs/SOTs as sales samples for demonstration to such agencies.

Section 9.6 Manufacturers’ use of contractors to perform work on firearms. As part of the manufacturing process to produce firearms for subsequent sale, some manufacturers contract with other persons to perform steps in the manufacturing process. As discussed in Chapter 7, these contractors are also manufacturers subject to licensing as firearms manufacturers and payment of NFA special tax. In addition, a manufacturer’s transfer of an NFA firearm to such a contractor and the return of the firearm to the manufacturer are transfers required to be approved by ATF. These transfers require approved Forms 3.

Section 9.7 Transfers of unserviceable NFA firearms. “Unserviceable firearms” are firearms “incapable of discharging a shot by means of an explosive and incapable of being readily restored to a firing condition.”172 They are still “firearms” for purposes of the NFA and must be registered in the NFRTR to be lawfully possessed and transferred. However, their transfer is not subject to transfer tax.173 To lawfully transfer unserviceable firearms, Form 5 transfer applications must be filed with ATF and approved. Appendix C contains a copy of the form. Form 5 applications to transfer the firearms to individuals must be accompanied by transferees’ fingerprints and photographs on FBI Forms FD-258. Applications will be disapproved if receipt or possession of the firearms would place transferees in violation of Federal, State, or local law. In the case of transfers to individuals, the transferees must have an appropriate law enforcement official sign the law enforcement certification on the form. See Section 9.9 for further information on the law enforcement certification. A Form 5 transfer application will not be approved if the transferee is an individual residing outside the State in which the transferor resides; however, as previously discussed, there is an exception for FFLs’ over-the-counter transfers of rifles and shotguns to non-residents if the laws of the transferors’ and transferees’ States are complied with. Transfers pursuant to Forms 5 may not be made until approved.

Section 9.8 U.S. Government-owned firearms. Conveyances of U.S. Government-owned NFA firearms to FFLs/SOTs for repair, modification, or performing other work such as incorporating the firearms into a weapons system require no approved ATF transfer or registration. The same is true for the return of the firearms to U.S. Government entities.

Section 9.9 Law enforcement certifications. These certifications on Forms 1 and 4 must be signed by an appropriate law enforcement official when the forms seek the transfer or making of an NFA firearm to or by an individual. However, as stated in Section 9.5.4.1, the certifications are not required when estate firearms are distributed to lawful heirs. As provided by regulations, the certificate must state that the certifying official is satisfied that the individual’s fingerprints and photographs accompanying the

171 26 U.S.C. 5844(3) 172 26 U.S.C. 5845(h) 173 27 CFR 479.91

Advanced Estate Planning and Administration 2016 4–63 Chapter 4—Firearms in Estate Administration

application are those of the applicant and that the official has no information indicating that the receipt or possession of the firearm would place the transferee in violation of State or local law or that the transferee will use the firearm for other than lawful purposes. Acceptable certifying officials include chiefs of police, county sheriffs, heads of State police, State or local district attorneys, or “such other persons whose certificates may in a particular case be acceptable to the Director.”174 Examples of other officials whose certifications have been found acceptable include State attorneys general and judges of State courts having authority to conduct jury trials in felony cases.

If another official is proposed as an acceptable certifying official, the transferor may, in advance of filing the transfer form, submit a written request to the NFA Branch whether the official is an acceptable certifying official. Alternatively, the transfer form may be filed with the official’s certificate. If the certification is unacceptable, ATF would disapprove the form and return it to the proposed transferor.

9.9.1 Is a law enforcement officer required to sign the certification? In some jurisdictions, officers whose certifications on a transfer form would be acceptable will not sign the certifications for reasons of their own. These officials cannot be compelled to sign the certifications.

9.9.2 Is a law enforcement certification acceptable if signed by an official outside the jurisdiction where the transferee resides? No. The certification must be signed by an official having jurisdiction where the transferee resides.

Section 9.10 Transfers of imported NFA firearms

9.10.1 Firearms imported for government agencies. As discussed in Chapter 8, NFA firearms may be imported for sale to Federal, State, or local government agencies. For approval of these imports, the importer’s Form 6 permit application must be accompanied by the agency’s letter or purchase order reflecting the purchase of the firearms. Appendix D contains a sample letter for use by an agency ordering imported firearms. Transfer of the firearms to the purchasing agency requires an approved Form 5. If a qualified NFA dealer received the agency’s order and placed it with the importer, the importer may transfer the firearms to the dealer on an approved Form 3 and the dealer, in turn, would use an approved Form 5 to transfer the firearms to the agency.

9.10.2 “Sales samples.” As discussed in Chapter 8, NFA firearms may be imported for use as sales samples by qualified NFA importers and dealers to demonstrate the firearms to government agencies and generate possible future sales to such agencies. As provided by the regulations, a Form 6 application to import such sample will be approved if it is established by specific information attached to the application that the firearm is suitable or potentially suitable for an agency’s use; the expected governmental customers requiring a demonstration of the firearm; information as to the availability of the firearm to fill subsequent orders; and letters from agencies expressing a need for a particular model or interest in seeing a demonstration of a particular firearm.175 Appendix D contains sample letters for use in acquiring imported sales samples, including a qualified NFA dealer’s letter ordering a sales sample from an importer and an agency’s letter requesting a demonstration of a sales sample. An importer’s transfer of a sales sample to a dealer requires an approved Form 3.

174 27 CFR 479.85 175 27 CFR 479.112(c) and (d)

Advanced Estate Planning and Administration 2016 4–64 Chapter 4—Firearms in Estate Administration

9.10.3 Transferring multiple quantities of the same firearm model as “sales samples.” As provided by the regulations, applications to import or transfer more than one firearm of a particular model for use as a sales sample by an importer or dealer must establish the importer’s or dealer’s need for the quantity of samples sought to be imported.176 In the case of machineguns imported on or after May 19, 1986 (as well as machineguns domestically manufactured after that date), ATF Ruling 2002-5 holds that if an FFL needs to demonstrate a particular model of machinegun to an entire police department or SWAT team, ATF will approve the transfer of two machineguns of that model to the dealer as sales samples. Additional quantities will be allowed if an FFL can document the need for more than two machineguns of a particular model.

Section 9.11 Transfers of machineguns imported or manufactured on or after May 19, 1986

9.11.1 Machinegun prohibition in 18 U.S.C. 922(o). This statute makes it unlawful to transfer or possess a machinegun, except for transfers to or by, or possession by or under the authority of, the United States or a State, or machineguns lawfully possessed before May 19, 1986 (that is, machineguns in the U.S. and registered in the NFRTR). Regulations implementing the statute allow domestic manufacturers to lawfully manufacture and stockpile machineguns for future sale to Federal and State agencies, for distribution to FFLs/SOTs as sales samples for demonstration to such agencies, or for exportation.177 The procedures discussed in Section 9.8 for transferring imported firearms to government agencies or to FFLs for use as sales samples apply as well to domestically manufactured machineguns.

9.11.2 May machineguns subject to section 922(o) be transferred to government contractors? The statute provides no exception for the lawful possession of these machineguns by government contractors for use in testing, research, design, or other work in fulfilling government contracts. One specific exception to this general rule appears in the Atomic Energy Act of 1954, 42 U.S.C. 2201a. This recently enacted provision allows for machinegun possession by security personnel engaged in the protection of Nuclear Regulatory Commission facilities or radioactive materials. Note also that although the NFA provides for the importation of NFA firearms for scientific or research purposes or for testing or use as a model by a registered manufacturer, the prohibition in Section 922(o) contains no exception that would permit the lawful possession of machineguns in the U.S. for those purposes; thus, applications to import machineguns for those purposes would be denied.

Section 9.12 Are FFLs/SOTs required to initiate a background check of the transferee under the Brady Law in connection with the transfer of an NFA firearm? No. Although 18 U.S.C. § 922(t) requires an FFL to complete a National Instant Criminal Background Checks System (NICS) check of the firearm recipient prior to completing the transfer, subsection 922(t)(3)(B) removes ATF-approved transfers of NFA firearms from the NICS requirement for individuals.

9.12.1 NFA Transfers to other than individuals. Subsequent to the approval of an application requesting to transfer an NFA firearm to, or on behalf of, a partnership, company, association, trust, estate, or corporation, the authorized person picking up the firearm on behalf of, a

176 Ibid. See also 27 CFR 479.105(d) 177 27 CFR 479.105(c)

Advanced Estate Planning and Administration 2016 4–65 Chapter 4—Firearms in Estate Administration

partnership, company, association, trust, estate, or corporation from the FFL must complete the Form 4473 with his/her personal information and undergo a NICS check. See also, question P60 in the ATF FAQs.

9.12.2 NFA transfer with other GCA firearm. An application to transfer an NFA firearm that includes a firearm regulated by the GCA, (e.g., silencer with a pistol, wallet-holster with pistol, etc.), requires the completion of a Form 4473 and NICS check prior to transfer of the GCA firearm. This includes the transfer of a firearm where the suppressor is permanently attached to the firearm. The GCA firearm can only be transferred after the required NICS check is completed. The serial number of the GCA firearm and the permanently attached NFA firearm must be included on the ATF form 4473. FFL/SOT payers are also responsible for and adhering to all applicable State and local requirements for NFA transfers. If the FFL/SOT is awaiting ATF approval of the transfer application, the unattached GCA firearm can be transfer prior to the completion of the NFA transfer, however, an additional NICS check may be necessary if the transfer is to a non-individual.

Section 9.13 May an FFL/SOT transfer a personally owned destructive device without qualifying to do business in destructive devices? Persons engaged in the business of dealing in firearms must have a GCA license authorizing them to deal in the type of firearms in which they deal. If they engage in the business of dealing in destructive devices, they must have a license to do so as required by 18 U.S.C. 923(a)(3)(A). However, ATF recognizes that persons licensed to deal in firearms other than destructive devices may lawfully maintain a personal collection of destructive devices and occasionally dispose of them as personal firearms on Forms 4 without having a license to deal in such devices. But if the dealer’s receipt and disposition of these devices become repetitive, ATF may infer that the dealer is engaged in the business of dealing in the devices and require him/her to be licensed as a dealer in such devices. There is no precise number of transactions that would trigger the license requirement.

Section 9.14 Transferable Status and the Form 10. Unregistered firearms obtained by State or local government agencies through abandonment or forfeiture are registered on an ATF Form 10. See 27 CFR § 479.104. Upon registration the Form 10 is marked “official use only,” and subsequent transfer and registration is limited to the official use of other State or local government entities. The firearms may not enter ordinary commercial channels. NFA firearms which were registered on Form 10 but were transferred to an FFL or individual prior to the effective date of ATF Ruling 74-8 may continue to be possessed in commercial or private channels. If the firearm was still registered to the State or local entity on Form 10 at the time of the effective date of ATF Ruling 74-8, the firearm may only be transferred to another government entity for “official use only.”

Advanced Estate Planning and Administration 2016 4–66 This final rule was signed by the Attorney General on January 4, 2016. It is effective 180 days after date of publication Chapterin the Federal 4—Firearms Register. inThe Estate final rAdministrationule published in the Federal Register may differ slightly from this version as a result of Federal Register formatting.

Advanced Estate Planning and Administration 2016 4–67 Chapter 4—Firearms in Estate Administration

The complete document may be downloaded here: https://www.atf.gov/file/100896/download

Advanced Estate Planning and Administration 2016 4–68 Chapter 4—Firearms in Estate Administration

The complete document may be downloaded here: https://www.justice.gov/opa/file/800606/download

Advanced Estate Planning and Administration 2016 4–69 Chapter 4—Firearms in Estate Administration

Advanced Estate Planning and Administration 2016 4–70 Chapter 4—Firearms in Estate Administration

U.S. Department of Justice Bureau of Alcohol, Tobacco, Firearms and Explosives Office of the Director ______Washington, DC 20226

January 2, 2015

18 U.S.C. 921(a)(3)(A) and (B): DEFINITIONS (FIREARM) 18 U.S.C. 921(a)(10): DEFINITIONS (MANUFACTURER) 18 U.S.C. 921(a)(11)(B): DEFINITIONS (DEALER) 18 U.S.C. 921(a)(21)(A): DEFINITIONS (ENGAGED IN THE BUSINESS) 18 U.S.C. 922(a)(1)(A): LICENSE REQUIRED 18 U.S.C. 923(i): IDENTIFICATION OF FIREARMS 27 CFR 478.92(a): IDENTIFICATION OF FIREARMS

Any person (including any corporation or other legal entity) engaged in the business of performing machining, molding, casting, forging, printing (additive manufacturing) or other manufacturing process to create a firearm frame or receiver, or to make a frame or receiver suitable for use as part of a “weapon … which will or is designed to or may readily be converted to expel a projectile by the action of an explosive,” i.e., a “firearm,” must be licensed as a manufacturer under the Gun Control Act of 1968 (GCA); identify (mark) any such firearm; and maintain required manufacturer’s records. A business (including an association or society) may not avoid the manufacturing license, marking, and recordkeeping requirements of the GCA by allowing persons to perform manufacturing processes on firearms (including frames or receivers) using machinery or equipment under its dominion and control where that business controls access to, and use of, such machinery or equipment. ATF Ruling 2010-10 is hereby clarified.

ATF Rul. 2015-1

The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) has received inquiries from the public asking whether Federal Firearms Licensees (FFL), or unlicensed machine shops, may engage in the business of completing, or assisting in the completion of, the manufacture of firearm frames or receivers for unlicensed individuals without being licensed as a manufacturer of firearms.

Unlicensed individuals occasionally purchase castings or machined/molded or other manufactured bodies (sometimes referred to as “blanks,” or “80% receivers”) that have not yet reached a stage of manufacture in which they are classified as “firearm frames or receivers” under the Gun Control Act of 1968 (GCA) and implementing regulations. Once purchased, these individuals may perform minor drilling and machining activities in or on the fire control area or other critical areas of the castings or machined/molded bodies sufficient to create a “firearm frame or receiver” under the law. Although the frame or receiver may be sufficiently complete

Advanced Estate Planning and Administration 2016 4–71 Chapter 4—Firearms in Estate Administration

-2-

to be classified and regulated as a “firearm,” it generally requires substantial additional machining before it can accommodate fire control components such as a trigger, hammer, or sear and be used to expel projectiles. For instance, a casting of an AR-15 type receiver can be machined using common power tools so that it reaches a stage of manufacture that it would be classified as a “firearm frame or receiver,” yet incapable of being assembled into a weapon that will expel projectiles. Unlicensed individuals propose to take either a blank, or a frame or receiver (not marked with a serial number or any other marks of identification) to a licensed dealer-gunsmith or machine shop for further machining and finishing so that it can be assembled into a complete or functional firearm as designed. The FFLs or unlicensed machine shops would then use their own equipment, such as a Computer Numeric Controlled (CNC) machine or other means, to finish the blank or frame or receiver into one that can be used to assemble a weapon capable of firing projectiles.

The GCA, 18 U.S.C. § 921(a)(1), defines a “person” to include “any individual, corporation, company, association, firm, partnership, society, or joint stock company.” Section 921(a)(10), defines a “manufacturer” as any person engaged in the business of manufacturing firearms or ammunition for purposes of sale or distribution. As defined by section 921(a)(21)(A), the term “engaged in the business” means, as applied to a manufacturer of firearms, “a person who devotes time, attention, and labor to manufacturing firearms as a regular course of trade or business with the principal objective of livelihood and profit through the sale or distribution of the firearms manufactured.” Because “manufacturing” is not defined by the GCA, courts have relied on the ordinary meaning of the word, including actions to “make a product suitable for use.” See, e.g., Broughman v. Carver, 624 F.3d 670, 675 (4th Cir. 2010). Section 921(a)(11)(B) defines a “dealer,” in relevant part, as any person engaged in the business of repairing firearms or of making or fitting special barrels, stocks, or trigger mechanisms to firearms.” A person meeting this definition is commonly referred to as a “gunsmith.”

Section 921(a)(3), defines a “firearm,” in relevant part, as both a “weapon … which will or is designed to or may readily be converted to expel a projectile by the action of an explosive” (921(a)(3)(A)), and the “frame or receiver of any such weapon” (921(a)(3)(B)). Under section 923(i), licensed manufacturers must identify each firearm manufactured by a serial number in the manner prescribed by regulation. Federal regulations at 27 CFR 478.92(a)(1) add that “a licensed manufacturer … must legibly identify each firearm manufactured … [b]y engraving, casting, stamping (impressing), or otherwise conspicuously placing … an individual serial number” on the frame or receiver, and certain additional information - the model (if designated), caliber/gauge, manufacturer’s name, and place of origin on the frame, receiver, or barrel. Regulations further require the serial number to be at a minimum depth and print size, and the additional information to be at a minimum depth. Additionally, the serial number must be placed in a manner not susceptible of being readily obliterated, altered, or removed, and not duplicate any serial number placed by that manufacturer on any other firearm.

In ATF Ruling 2010-10 (approved December 27, 2010), ATF advised that licensed dealer- gunsmiths (type 01) may legally perform certain firearm manufacturing activities if specified conditions were met. Specifically, that ruling held that licensed gunsmiths could conduct such manufacturing activities if the firearms were: (1) not owned, in whole or in part, by the dealer- gunsmith; (2) returned by the dealer-gunsmith to the importer or manufacturer upon completion of the manufacturing processes, and not sold or distributed to any person outside the

Advanced Estate Planning and Administration 2016 4–72 Chapter 4—Firearms in Estate Administration

-3-

manufacturing process; and (3) already properly identified / marked by the importer or manufacturer in accordance with Federal law and regulations.

ATF Ruling 2010-10 is based on two distinct but related premises. First, it recognizes that there are specific activities traditionally performed by gunsmiths, i.e., repairing, modifying, embellishing, refurbishing, installing parts, or specialized finishing of functional frames or receivers. Such activities do not include, and the Ruling does not directly address the machining or other manufacturing processes required for the frame or receiver to be created or any steps to make it suitable for use in assembling a “weapon … which will or is designed to or may readily be converted to expel a projectile by the action of an explosive.” Second, the Ruling recognizes that, by transferring the firearm only to another FFL involved in the manufacturing process, there is no “sale or distribution of the firearm manufactured” requiring a manufacturer’s license.

Machining or Other Manufacturing of Frames or Receivers Because the GCA contains distinct definitions of “firearm,” one can be a manufacturer of a “frame or receiver,” and also a “weapon … which will or is designed to or may readily be converted to expel a projectile by the action of an explosive” that incorporates that frame or receiver. See Broughman, 624 F.3d at 676 n.4 (“That Broughman manufactures ‘firearms’ within the meaning of one statutory definition rather than another does not render him any less a manufacturer of ‘firearms’ within the meaning of the Act.”) ATF Ruling 2010-10 assumes that licensed dealer-gunsmiths would perform certain activities on articles already classified as frames or receivers (i.e., no machining or other processes required to allow it to be used to assemble a weapon), such as assembly and applying special coatings and treatments. Implicit is the understanding that the manufacture of the frame or receiver was completed (for example, having an existing fire-control cavity), and it was marked by a licensed manufacturer in accordance with Federal law and regulations.

However, when a person performs machining or other manufacturing process on a blank to make a firearm “frame or receiver,” or on an existing frame or receiver to make it suitable for use1 as part of a “weapon … which will or is designed to or may readily be converted to expel a projectile by the action of an explosive,” that person has performed a manufacturing operation other than what is contemplated by the GCA of dealer-gunsmiths, i.e., persons described by section 921(a)(11)(B) as “engaged in the business of repairing firearms or of making or fitting special barrels, stocks, or trigger mechanisms to firearms.” In this context, “machining or other manufacturing process” includes making a frame or receiver, or taking any of the steps to make an existing frame or receiver functional – that is, suitable for use as part of a weapon that will expel a projectile by the action of an explosive.2 For example, in an AR-type weapon, “machining or other manufacturing process” would include any activity that creates a fire- control-cavity as designed. Although such an article may be classified as a “receiver” when it is indexed, machining or other manufacturing process takes place to create a receiver when material is actually removed from the cavity so that the fire-control-components may actually be installed.

1 See Broughman at 675 (“[T]he plain and ordinary meaning of the word ‘manufacture’ is ‘to make into a product suitable for use.’” (quoting Merriam-Webster Online Dictionary (2010)) Consequently, the GCA required a manufacturer’s license where a gunsmith assembled firearms from component parts.) 2 For purposes of this Ruling, activities associated with tapping and mounting a scope are considered neither “machining” nor a “manufacturing process.”

Advanced Estate Planning and Administration 2016 4–73 Chapter 4—Firearms in Estate Administration

-4-

The activities discussed in ATF Ruling 2010-10 are not the manufacturing processes to create the firearm frame or receiver, or any of the steps that allow the frame or receiver to function when assembled into a complete weapon on behalf of non-licensed individuals. To the contrary, those gunsmithing activities are explicitly required to be done on behalf of a licensed manufacturer or importer who are required by 27 CFR 478.92(a)(2) to mark and serialize the frame or receiver prior to shipment to the gunsmith. As explained by the ruling, “[t]his will ensure that the frames or receivers can be traced by ATF in the event they are lost or stolen during the manufacturing process.” This distinction is also legally significant because manufacturing processes that create essential features, depending on the type of firearm, are necessary for the frame or receiver to function as part of a complete “weapon.” At this stage of production, the frame or receiver is different from one that a licensed gunsmith may receive and perform gunsmithing services because these manufacturing processes make the frame or receiver suitable for use in assembling a “weapon” under the GCA.

Distribution of Firearms Manufactured

Once the manufacturing processes have occurred and a frame or receiver has been made, however, to require licensing as a manufacturer, a person must still be engaged in the business through the “sale or distribution” of the firearms manufactured. ATF Ruling 2010-10 interpreted this phrase to exclude the transfer of firearms between Federal firearms licensees who are involved in the manufacturing process. The Ruling held, in part, that because the firearms manufactured were not “sold or distributed,” the contracted gunsmiths did not satisfy this statutory requirement for licensing as manufacturers. Rather, that Ruling expressly prohibits licensed gunsmiths from distributing firearms outside the manufacturing process and requires them to be returned to the licensed manufacturer that initially produced and marked the frame or receiver. Underlying this analysis is the fact that the GCA provides special privileges to FFLs involved in firearms transactions with other FFLs. These include the authority to transfer firearms interstate, and to transfer firearms without a background check or completion of ATF Forms 4473 (Firearms Transaction Records). In light of this, no “distribution” occurs when a licensed manufacturer sends firearms to another FFL who performs contracted manufacturing activities and returns them.

ATF Ruling 2010-10 does recognize that gunsmiths may improve firearms by participating in the manufacturing process. However, none of the enumerated processes (i.e., repairing, modifying, embellishing, refurbishing, installing parts, or specialized finishing) actually create a frame or receiver, or make an existing frame or receiver suitable for use in assembling a “weapon” capable of expelling a projectile. This is consistent with the traditional services that gunsmiths offer. Generally, licensed gunsmiths perform actions in repairing or improving firearms that are already complete weapons, or capable of being assembled as such. Gunsmiths do not perform the machining or other manufacturing processes to create frames or receivers, or make them suitable for use in assembling a weapon that can expel a projectile.

Although licensed gunsmiths return firearms to their customers after performing the contracted work, the GCA does not consider this to be a sale or distribution of the firearms manufactured. This is because the returned firearm has only been repaired or temporarily received for custom work – it has not been machined in a manner or otherwise created or made suitable for use as part of a weapon. However, when a licensed gunsmith takes in a frame or receiver to perform

Advanced Estate Planning and Administration 2016 4–74 Chapter 4—Firearms in Estate Administration

-5-

machining or other manufacturing process, that gunsmith “distributes” a firearm to the customer upon return because that manufacturing activity results in the making of a different “frame or receiver” and also a “weapon … which will or is designed to or may readily be converted to expel a projectile” – both defined separately as a “firearm” under the GCA.

Further, permitting a licensed gunsmith to perform manufacturing processes on a frame or receiver on behalf of an unlicensed person would lead to an absurd result. If the above mentioned activities were permitted, firearms could be legally manufactured without any markings or serialization by dealer-gunsmiths who could avoid licensing as a manufacturer simply because his/her customer is unlicensed. For example, instead of purchasing marked and serialized receivers or complete weapons from licensed dealers, individuals might purchase unregulated castings or machined/molded bodies from a supplier, perform a minor machining or other operation sufficient to create a “firearm frame or receiver,” contract with a gunsmith to perform necessary and substantial machining operations, and then assemble a complete weapon without marks of identification or records of production. Such activity runs contrary to a major purpose of the GCA in that it eliminates the ability of law enforcement to trace firearms used in crime, or stolen or lost firearms.

Use of Manufacturing Machines, Tools, or Equipment

An FFL or unlicensed machine shop may also desire to make available its machinery (e.g., a computer numeric control or “CNC” machine), tools, or equipment to individuals who bring in raw materials, blanks, unfinished frames or receivers and/or other firearm parts for the purpose of creating operable firearms. Under the instruction or supervision of the FFL or unlicensed machine shop, the customers would initiate and/or manipulate the machinery, tools, or equipment to complete the frame or receiver, or entire weapon. The FFL or unlicensed machine shop would typically charge a fee for such activity, or receive some other form of compensation or benefit. This activity may occur either at a fixed premises, such as a machine shop, or a temporary location, such as a gun show or event.

A business (including an association or society) may not avoid the manufacturing license, marking, and recordkeeping requirements under the GCA simply by allowing individuals to initiate or manipulate a CNC machine, or to use machinery, tools, or equipment under its dominion or control to perform manufacturing processes on blanks, unfinished frames or receivers, or incomplete weapons. In these cases, the business controls access to, and use of, its machinery, tools, and equipment. Following manufacture, the business “distributes” a firearm when it returns or otherwise disposes a finished frame or receiver, or complete weapon to its customer. Such individuals or entities are, therefore, “engaged in the business” of manufacturing firearms even though unlicensed individuals may have assisted them in the manufacturing process.

Held, any person (including any corporation or other legal entity) engaged in the business of performing machining, molding, casting, forging, printing (additive manufacturing) or other manufacturing process to create a firearm frame or receiver, or to make a frame or receiver suitable for use as part of a “weapon … which will or is designed to or may readily be converted to expel a projectile by the action of an explosive,” i.e., a “firearm,” must be licensed as a manufacturer under the GCA; identify (mark) any such firearm; and maintain required manufacturer’s records.

Advanced Estate Planning and Administration 2016 4–75 Chapter 4—Firearms in Estate Administration

-6-

Held further, a business (including an association or society) may not avoid the manufacturing license, marking, and recordkeeping requirements of the GCA by allowing persons to perform manufacturing processes on blanks or incomplete firearms (including frames or receivers) using machinery, tools, or equipment under its dominion and control where that business controls access to, and use of, such machinery, tools, or equipment.

Held further, this ruling is limited to an interpretation of the requirements imposed on persons under the GCA, and does not interpret the requirements of the National Firearms Act, 26 U.S.C. 5801 et. seq.

ATF Ruling 2010-10 is hereby clarified.

Date approved: January 2, 2015

B. Todd Jones Director

Advanced Estate Planning and Administration 2016 4–76 Chapter 4—Firearms in Estate Administration YES Violates PC § 30515(a)(1) the Rifle have any of these Flash Suppressor· Folding or Penal Code § 30515 (a) Does stock· Grenade, flare launcher Telescoping stock· Thumbhole § 5469 (d)· Forward pistol grip· features?·Pistol grip – 11 CCR xed

NO NO cartridges? LEGAL. NOT more than 10 Does the  magazine hold CLASSIFIEDAW Penal Code 30515 YES Roberti-Roos Assault Weapons Control of 1989Act The registration deadline for assault weapons listed in the Roberti-Roos ban was March 31, 1992. Senate Bill 23 (SB-23) The registration deadline for assault weapons as “defined by characteristics in SB-23 was December 31, 2000. The registration deadline for assault weapon as defined by Penal Code section 30515 “AK and AR-15 series” assault weapons was January 23, 2001. BMG Restrictions and Registration The registration deadline for “.50 BMG rifles” was April 30, 2006. IDENTIFICATION IDENTIFICATION SEMI-AUTO RIFLESEMI-AUTO Violates PC § 30510 (a) weapon or .50 BMG rifle. Violates PC § 30515 (a)(2) ILLEGAL Unregistered assault CALIFORNIA CENTERFIRE, CALIFORNIA YES INFO ** CHECK SIDE B for beneath the action of the weapon. CCR 11 § 5469 (d) (see Side B for pictures). AW(s) “After the deadlines”. magazine” that is not legally considered “detachable”. included. equipped). muzzledevice Violates PC § 17170 Violates PC § 30600 Violates PC § 30510 (a) or .50 BMG rifle. PC 30655 The rifle's overall length is Isthe rifle in Appendix B or C? ** collapsed or folded position (if Short barreled rifle. Measured Maglok and similar devices do not meet the criteria of a detachable magazine as to remove the magazine from the firearm. Therefore, it is configured with a “fixed BMG “shoulder fired” rifles are measured with the stockin the from bolt facethe to end of the NOTE: Magazine locks (Bullet Buttons, MAG-LOCK, Prince50, Raddlock, Range- NOTE * Active Duty Military: Personnel stationed in California barrelor permanentlya installed defined in CCR 11 § 5469 (a). A rifle equipped with a magazine lock requirestool a a pistol grip. They do not allow the user to grip the rifle with a pistol style grasp, nor do they protrude conspicuously may apply for an “AssaultWeapon Permit” for personally owned NOTE: Products such as the MonsterMan Grips and the California Rifles U15 stockstock meet do not the criteria of Configuration Violate PC § 30515 (a)(3) Single-Shot & Semi-Automatic .50 California registered assault weapon NO YES YES YES YES YES YES YES NO INFO ** CHECK SIDE B for A? BMG?” inches long? 11 § 5469 (a) configuration? NO NO NO NO NO NO Does the rifle have a California, before ban Was the centerfire rifle be fixed in the shortest registered as an “assault Isthe rifle's overall length weapon” or a “.50 BMG” in lessthan 30 inches? If less than 30 inches, can the rifle Isthe rifle listed in Appendix detachable magazine? CCR START Isthe rifle chambered in “.50 Isthe rifle barrelless than 16 Isthe rifle an AR or AK type?

Advanced Estate Planning and Administration 2016 4–77 Chapter 4—Firearms in Estate Administration MonsterMan Grip Grip MonsterMan

assault weapon in CA CA weapon in assault assault weapon in CA CA weapon in assault & CCR 11 § 5469 (d)11 CCR & § 5469 U15 Stock Stock U15 amagazine detachable5469 (a) and anythe one of CCR 11 § following: Categorythefirearmsare 1- i-RoosRobert original on listed assault section 30510(c). PC list weapons Category the definitiontargeting AR 2- was legally ambiguous was PC definition 30620(c). This firearmsand AK "series" in is in what CourtSupreme 2001 in themodified California by asknown Harrott the V.Kings County of (2001) 25 create additional list required toCal.4th was an 1138. The DOJ 5499 makeofmodel. It firearmsin CCR 11 § by and is available list". "series came referred as the and is sometimes to Then theAB2728,updatingever from list prevents thewhich DOJ after Jan 2007. Categorycharacteristic 3- are defined by listed features PC in 30515(a).sometimes These"SB23 referred are to as features"(Senate Bill 23). 5469 (d) A pistol grip CCR 11 § (e)stock. 11 § 5469 A thumbhole CCR A folding or telescoping stock. launcher.A or flare grenade launcher A suppressor. flash 5469 (b) CCR 11 § (c)5469 pistol A § 11 CCR forward grip. the capacitymore accept rounds. to than 10 30 inches. less than Definition of a "Pistol Grip" PC 30515(a) 30515(a) PC Grip" "Pistol a of Definition The 3 categories of an an of 3 categories The The 3 categories of an an of 3 categories The x x x x 30515(a) Notwithstanding shall 30510, section assault PC weapon Rifles following: the mean also 1. semiautomatic, Acenterfire capacity to rifle that has the accept x x x x x x 2. semiautomatic, Acenterfire magazinefixed rifle that has a with 3. semiautomatic, Ahatcenterfire t has an overall of length rif le "pistol grip that"pistolprotrudes grip conspicuously theof the beneath action the style which meansforthat a pistolweapon" in allows grasp a grip finger) can ofthe be index the thumb triggerweb and (between hand . firing while trigger the of po rtion top exposed the of the placed below

Muzzle Break Break Muzzle Flash Suppressor Flash Suppressor AK Series AK Appendix C Appendix n m aps t American Arms: AK-C 47, AK-F 47 47 AK-F 47, AK-C Arms: American 39 AK-F AK-Y Arms:, 39, American SLG SLR (all)Arsenal: Arsenal: (all) AK-47 B-West: (all) Hesse Arms: Model47 (all) Rifle STG 940 Arms: Wieger Hesse Inter Ordnance- Monroe, NC: AK-47 (all) Inter Ordnance- Monroe, NC: M-97 Inter Ordnance- Monroe, NC: RPK USA: Hunter I Saiga Rifle Kalashnikov l) MAADI MISR (al CO: (all) MAADI MISTR CO: Mitchell Arms, Inc.: AK-47 (all) Mitchell Arms, Inc.: AK-47 Cal .308 (all) Mitchell Arms, M-76, Inc.: M-90 RPK Inc.: Arms, Mitchell Norinco: 81 S (all) Norinco: 86 (all) AK-47Norinco: (all) HunterNorinco: Rifle Norinco:MAK 90 Sport 90-2, 90, NHM 91 Norinco: RPK Rif le Norinco: Ohio Ordnance Works: AK-74 Ohio Ordnance Works: ROMAK 991 S, Hunter Rifle 76 Val met: WUM:WUM (all) 11 § 5469 (e) CCR 11 § 5469 (a) 5469 (a) § CCR 11 (e) 11 § 5469 Definition of a "Thumbhole Stock" CCR CCR Stock" "Thumbhole a of Definition "Thumbhole stock" means a stock with a hole that allows allows a hole that with stock means a stock""Thumbhole throughto triggerthe the penetrate or into thumb of hand the stock firing. while Inc.: Carbon 15 Rifle AR Series AR Appendix B Appendix American Spirit: USA Model (all), M15 Armalite:10 AR (all) Armalite:Golden Eagle Bushmaster:XM15 (all) Colt: Law Enforcement (6920) Match TargetColt: (a ll) SporterColt: (all) B. F. D. Dalphon: DPMS:(all) Panther H-BAR, A2 EA-15 E1 Arms: EA-15 Eagle Eagle Arms: M15 (all) Frankford Arsenal: AR-15 (all) Arms: HAR 15A2 (all) Hesse SR-15 Knights: RAS (all), (all) SR-25 Knights: (all) AR (all) Baer: Ultimate Les Olympic Arms: AR-15, Car-97, PCR (all) Ordnance, Inc.: AR-15 (all) SGA Palmetto: Professional Ordnance, PWA:All Models Arms, River Inc.:Rock Car A2 Rock River Arms, Inc.: Car A4 Flattop Arms, River Inc.:Rock LE Tactical Carbine RockArms,River Inc.: NM A2 DCM- Legal Arms, River Inc.:Rock Standard A-2 Rock River Arms, Inc.: Standard A-4 Flattop Wilson Combat: AR-15 nor use of a tool being required. tool usenor being a of : is a device to or integral attached muzzle t he with of a firearm, to designed redirect the : The : The major a flash between difference suppressor a muzzle and size brake is of t the he : is to or a device attached integral muzzle the wit h of a firearm, to eliminate designed or CCR 11 § 5469 (b) CCR 11 § 5469 (a) (a) CCR 11 § 5469 Appendix A A Appendix Definition of a "Flash Suppressor" CCR 11 § 5469 (b) 5469 Definition"Flash CCR 11 § a Suppressor" of Roberti-Roos list AW Definition of a "Detachable Magazine" Magazine" of a "Detachable Definition Armalite: AR-180 AR-180 Armalite: Beretta: AR-70 Assault Rifle Bushmaster M-900 Calico: AR-15 Colt: (all) AR110C AR 100, Daewoo: Daewoo: K-1, K-2, Max 1, Max 2 FabriqueNationale: 308 Match, Sporter Fabrique Nationale: FAL, LAR, FNC 93, 94,91, HK: PSG-1 Uzi Galil, IMI: ENG: M-68 J&R ARMMAADI CO: AK47, Made in China: 56, 56S, 84S, 86S, AKS MadeChinain AK,: AK47, AK47S, AKM Made in Spain: CETME Sporter MAS: 223 Norinco: 56, 56 S, 84S,86S AKSPoly technologies: AK47, RPB Industries, Inc.: sM10, sM11 SG AMT,551 SG 550, SIG: PE-57, SKS w/ detachable magazine SAR-48 BM59, Springfield Armory: MK-6 Sterling: AUG Steyr: SWDIncorporated: M11 Valmet: M62S, M71S, M78S Weaver Arms: Nighthawk magazine""Detachablemeans any ammunition device feeding that removedcanreadily be fromfirearm the withneither disassemblyfirearm of the action tool.cartridge considereda Ais ammunition or bullet suppressor""flash means device any designed, intended, functions or that to perceptibly or redirect reduce from flash muzzle shooter'sthe field of vision. Suppressor/FlashFlash Hider incandescent the reduce flash firearm's the of discharge. Although reduce can they visibility the firearm's location whethe of are primarilyfired, they to prevent the designed shooter's vision blinded from being at by the flash flash Many night. hidersalsoact as a muzzle brake. Characteristics suppressorflash a of : majorityThe devices two come in of these styles. multi the and The birdcage prong suppressor.flash inner The cavity of the muzzle device is usually diameter several bore. of t the times muzzle The he device largeusually slots has propelling to allow gasses the to blow through: redirecting, reducing, eliminating muzzle the fro flash shooters fieldthe of vision. Brake/MuzzleMuzzle Compensator propelling gasses to counter firearm's: t he recoil, rise. muzzle brake muzzle of Characteristics inner cavity.inner cavity The of a muzzle brake is slightlyjust usually thelarger than diameterbore. This of the better t r propellinghe gasses behind bullet. the forces/redirects This more of the gasses to escape small through the in ports/slots device.muzzle ports/slots These are usually machined/drilled strategic in or locations to divert angled gasses the to reduce firearms: recoil,the rise. muzzle

Advanced Estate Planning and Administration 2016 4–78 Chapter 4—Firearms in Estate Administration

Advanced Estate Planning and Administration 2016 4–79 Chapter 4—Firearms in Estate Administration

Advanced Estate Planning and Administration 2016 4–80 Chapter 5 Is the Trust Funded?

Eric Wieland Samuels Yoelin Kantor LLP Portland, Oregon

Contents Revocable Living Trusts 5–1 I. Real Property 5–1 II. Tangible Personal Property ...... 5–2 III. Financial Accounts 5–2 IV. Partnerships, Closely Held Business Interests, LLCs ...... 5–2 V. Qualified Plans/Retirement Accounts/401(k)s 5–3 VI. Beneficiaries ...... 5–3 VII. Joint RLTs ...... 5–3 VIII. All Inclusive Assignment ...... 5–3 Personal Residence After the Death of the First Spouse 5–4 “Difficult” Assets: Airplanes, Timeshares, Oil and Mineral Rights, etc...... 5–5 I. Time Shares 5–5 II. Aircraft ...... 5–5 III. Oil and Mineral Rights ...... 5–6 Retirement Accounts with Trusts as Beneficiaries ...... 5–6 All Inclusive Assignment of Assets to Trustee of Revocable Living Trust 5–9 Washington Department of Revenue Real Estate Excise Tax Affidavit Form ...... 5–11 Application for Exemption from Washington County (Oregon) Transfer Tax ...... 5–13 Chapter 5—Is the Trust Funded?

Advanced Estate Planning and Administration 2016 5–ii Chapter 5—Is the Trust Funded?

Revocable Living Trusts

Revocable Living Trusts (RLT) first started being used by estate planners in the 1970s, and their popularity and use has spread significantly since then. Touted for the ability to avoid probate, the ease in transition upon disability or death, and privacy, RLTs have become very common. So common in fact, that new estate planning clients often times say they need a trust without really understanding what it is; only knowing that their neighbor, the guy on the radio, or their brother-in-law says they need one. If after explaining to the client what RLTs are, how they work, and the pros and cons, the client wants an RLT, educating the client on how the trust and their roles as Trustee work are just as important as making sure the language in the document fulfills the client’s goals. Part of that education involves how to ensure the trust is properly funded and assets are properly titled.

I. Real Property. If an individual owns real property outright, a deed must be prepared to transfer the real property to the Trust. If the real property is located in another state, it is recommended that counsel licensed to practice law in that state is retained to transfer the property. You may also contact a title company in that area to assist.

A. Transfer Taxes. Before preparing the deed to transfer property into a trust, you need to know if the county (e.g. Washington County) and/or the State (e.g. Washington) has a transfer tax. If either does, you need to understand if an exemption exists for transfers into a Trust. If there is an exemption, you need to ensure that the exemption paperwork is prepared. Failure to do so, or improperly completing the paperwork, can lead to real headaches for you and your client. If there are no exemptions, you need to inform your client before triggering the tax.

B. Joint Ownership. If you are meeting with a married couple who own real property as “husband and wife” and want an RLT, when you transfer the property from “husband and wife” to tenants-in-common between two RLTs or into the name of a joint RLT, the couple’s rights are changing with respect to the property. One party can sell transfer or encumber his or her interest without notice or approval from the other party.

C. Mortgages. Even if the property is encumbered with a mortgage, at least in Oregon, people can transfer their personal residence into an RLT for estate planning purposes without receiving permission from the mortgage holder or triggering the due on sale clause. This may not always be true in every jurisdiction or for non-personal residence properties. Be sure to find out if the real property is encumbered and what the rules are before transferring the underlying deed.

D. Re-financing. Sometimes, when home owners want to refinance, the bank will require them to remove the home from trust and place it into their

Advanced Estate Planning and Administration 2016 5–1 Chapter 5—Is the Trust Funded?

individual names prior to completing the refinancing. The same can be true for obtaining a HELOC. Remind your clients that if they remove property from the RLT, they must remember to retitle the property in the name of the Trust for the Trust provisions to control and to avoid probate.

E. Restrictions on Transfer. If the real property is jointly owned with other individuals as a partnership or otherwise, there may be a restriction on transfer provision in the ownership or partnership agreement. Be sure to ask to see a copy of any ownership agreement to ensure there are no restrictions. If there is a restriction, you will need to go through the proper steps to transfer the property into the Trust pursuant to the agreement.

F. Insurance. Once the real property is transferred into the RLT, have your clients contact their insurance agent to explain the transfer was for estate planning purposes, they are still the owners, and their social security numbers still apply.

II. Tangible Personal Property. Some practitioners document the transfer of the Settlor’s personal property by having the client sign a bill of sale, assignment of personal property, or all-inclusive assignment effectively transferring the personal property into the RLT. Some practitioners add a statement to the RLT itself or include personal property in an attached schedule. Whatever your practice, be sure that the document transferring the personal property is easily identifiable and can be located after the Settlor’s death. Tangible Personal Property that requires titling (cars, boats, etc.) can be addressed with the appropriate agency or titles.

III. Financial Accounts. To avoid probate, financial Accounts must be titled in the name of the RLT or the account must have contractual language that transfers the account to the RLT or another owner upon death. Providing the Settlors/Trustees with a certificate of trust and directions on how to contact the financial institutions to transfer the accounts is imperative. Following up with the client to ensure this step has been taken is good practice and gives you an opportunity to speak with the client again. Sometimes an individual does not want to transfer their main operating account into the Trust because it would be inconvenient with auto-drafts, direct deposits, and direct withdrawals. The client may be hesitant about getting new account numbers, new checks, or going through the hassle of this process. One way to mitigate this situation is to direct your client to place a transfer on death or payable on death provision on any account that they do not want titled in the name of the RLT. The TOD/POD would name the Trust as the recipient of the account upon the individual’s death.

IV. Partnerships, closely held business interests, LLCs. To the extent your client holds interest in one of these entities, it is important to prepare the

Advanced Estate Planning and Administration 2016 5–2 Chapter 5—Is the Trust Funded?

appropriate forms to transfer his or her interest into the RLT. You will need to look at the operating, shareholder, or partnership agreement to determine the appropriate steps and whether approval must be received prior to any transfer. You may need to prepare an assignment or have new stock issued showing the transfer into the RLT.

V. Qualified Plans/Retirement Accounts/401(k)s. 99.9% of the time, these accounts should not be transferred into the name of the RLT. The accounts should remain owned by the Settlor, individually. It is preferable for the beneficiary designations to name the individual recipients or the testamentary trust created by the RLT as the beneficiaries instead of the RLT itself. Depending on the terms of the RLT and the custodian of the account, if the RLT is named as the beneficiary, then the qualified account may be subject to income tax sooner than if an individual beneficiary received it or if the plan funds were paid into a conduit trust. Additionally, some plans and ERISA rules require spousal permission before naming someone other than the spouse as the beneficiary. Though understanding what the beneficiary designation says is very important, before changing it, be sure to understand what rules need to be followed and what the tax result will be before advising your client to change any designations.

VI. Beneficiaries. If done properly, the RLT replaces the need of probating the Will because the RLT will transfer all the assets it owns after the Settlor’s death. Because RLTs are so prevalent, instead of just naming individuals as beneficiaries, consider adding the following language: “or to a RLT established for his/her benefit, if such Trust is then in existence.” The purpose of this language is to give flexibility in case the named beneficiary’s rights are vested but he or she becomes incapacitated or dies. If that beneficiary created an RLT, why force them to transfer the vested interest through probate? Provide the option that the interest transfers to the RLT instead.

VII. Joint RLTs. Many married couples choose to create a joint trust since a large amount of their assets are already owned jointly. When creating the Joint RLT, be sure to specify how the property is to be divided and treated for ownership purposes. Is any property subject to community property rules? Is the property owned 50/50? Is there any separate property owned only by one Settlor?

VIII. All Inclusive Assignment. Because life happens and assets sometimes fall between the cracks, practitioners have started using “All Inclusive Assignments” as a belt and suspenders approach to transfer assets into the Trust. The concept behind the All Inclusive Assignment is that it is a notarized document that states that it is the intention of the Assignor to transfer all of their assets, real and personal, owned now or in the future, into the RLT. This is handy, especially in the situation when the Settlor’s health may be

Advanced Estate Planning and Administration 2016 5–3 Chapter 5—Is the Trust Funded?

failing and the likelihood that they will transfer all of their property is not very good or not something they want to spend time doing. The All Inclusive Assignment has been accepted with title companies and counties when recording deeds after the Settlor’s death with the position that the property is owned by the RLT and not the Settlor. Before using an All-Inclusive Assignment, be sure to list any assets (I.E. Retirement Accounts or Restricted Assets) that are not subject to the All Inclusive Assignment. To the extent there are assets owned by the Settlor that are subject to Payable/Transfer on Death provisions, joint ownership, or other contractual or legal control, the All Inclusive Assignment might not apply to these assets unless the Settlor could unilaterally change them.

Personal Residence after the Death of the First Spouse

The personal residence is often times one of the client’s most valuable assets, but also the one with the most sentimental and emotional ties. The American culture places great prominence on owning one’s home and there is security in that feeling. With the current real estate market in Oregon, the family home and retirement accounts often times make up the bulk of the value of most middle class estates. Due to the income tax restrictions on retirement accounts, when we factor in Oregon’s estate tax, the personal residence, from a non-emotional perspective, is the best asset to use for estate tax planning. But placing half of the home into a credit shelter trust has its downside. What happens if there is a mortgage? What happens if there are no other assets in the trust to cover maintenance, taxes, insurance, etc? What happens to the Section 121 exclusion once the residence is transferred into the credit shelter trust? Can the surviving spouse purchase the home from the credit shelter trust? If so, how do you decide the price if the surviving spouse is the Trustee? Can the credit shelter trust finance the purchase?

All of these issues can be overcome with patience and creativity. The best case scenario is for the surviving spouse to obtain an appraisal on the property and purchase the credit shelter trust’s interest. With the step up in basis, there should be no or very little tax consequence to the sale. Having the ultimate beneficiaries approve the purchase price and sale should eliminate any future exposure for self-dealing. However, if the surviving spouse does not have assets to purchase the property, then setting up appropriate boundaries and accounting is important. The surviving spouse could purchase the property on a note from the credit shelter trust but the surviving spouse must make the payments with appropriate interest and the ultimate beneficiaries should approve this transaction. The credit shelter trust should secure its interest in the property with a trust deed or other form of security and the transaction be respected in practice and action.

The credit shelter trust and the surviving spouse should split the costs associated with maintenance, taxes, and insurance on the property. If the credit shelter trust does not have the resources to cover these expenses, then the surviving spouse should keep a log of these expenses because when the surviving spouse dies, any expenses she pays on behalf of the trust are an asset in her estate.

Advanced Estate Planning and Administration 2016 5–4 Chapter 5—Is the Trust Funded?

If the beneficiaries of the credit shelter trust are different than the beneficiaries of the surviving spouse, then the use of the personal residence can become a sensitive issue and expose the Trustee to liability for not being properly diversified. In a perfect world, the personal residence would not be used for estate tax purposes only. However, the world is not perfect. In situations where it makes economic sense to split the personal residence between a credit shelter trust and the surviving spouse, be sure to speak with your client to determine the best way to make this imperfect situation as palatable as possible.

“Difficult” Assets: Airplanes, Timeshares, Oil and Mineral Rights, etc.

Thankfully, when funding an RLT or other Trust, most assets are really easy to transfer: prepare and record a deed, sign an assignment, or fill out a form with a financial institution and you are good to go. Unfortunately, there are some assets that are not so easy and may require some extra effort or research on your part. You need to understand now only how to effectively transfer this “Difficult” Asset, but also if there are any unintended ramifications.

I. Time Shares. Reading the timeshare contract or underlying controlling document is vital. Each timeshare organization has its own rules and processes. If the timeshare is stateside and your clients have a deed, transferring the timeshare can be accomplished by recording a proper deed transferring ownership. This could result in extra fees from the timeshare company. If the Settlors don’t have a deed, then having the timeshare organization transfer the ownership on its books is required, which can also result in a fee. If the timeshare is overseas, there may be limitations on transferring into an RLT, but there may be other options. Timeshares are some of the most overlooked assets when funding an RLT and can cost a substantial amount of money (in respect to their worth) upon someone’s death that some thoughtful planning beforehand could have avoided. Timeshares are difficult to abandon and a family may be forced to deal with probate in another jurisdiction because the timeshare was overlooked when the RLT was formed.

II. Aircraft. Hopefully the aircraft is owned by an LLC or other entity that will help minimize liability. If it is owned by an entity, then transferring the interest is usually just as easy as following the operating agreement and assigning the interest or having new shares issues. If the aircraft is owned in the individual’s name, then you will need to follow the FAA’s guidelines which may include preparing an FAA Bill of Sale, completing the FAA Registration, providing a certified true copy of the Trust, preparing an affidavit, and submitting this, along with a fee to the FAA. Though aircraft can be expensive to own and operate and have significant liability exposure, depending on how they are used and the type, they can carry significant tax benefits. Before transferring the ownership interest in any aircraft, whether to an RLT, other trust, or entity, be sure to obtain tax advice to determine if the transfer might have adverse tax consequences.

Advanced Estate Planning and Administration 2016 5–5 Chapter 5—Is the Trust Funded?

III. Oil and Mineral Rights. If the Oil and Mineral Rights are owned through a partnership or other entity, then the agreement governing the entity prevails. As discussed above, you may need to obtain approval prior from the other owners or satisfy some other step to complete the transfer. If the Settlor owns the oil or mineral rights outright, then you will need to work within the local jurisdictional rules. There are deeds or other recordings that are necessary to complete the transfer. Unless this is your specialty, I encourage you to work with a lawyer authorized to practice law in the appropriate jurisdiction that works in this field to assist you in transferring your client’s interest in the Oil and Mineral Rights to their trust.

Retirement Accounts with Trusts as Beneficiaries

Before naming a Trust as the beneficiary of a retirement account, I always work with the client to determine if that is the best way to achieve his or her goals. If there is another way to achieve the goals, then I encourage the client to consider these options instead because naming a trust as a beneficiary of a retirement account can result in unintended consequences and have greater complications. However, sometimes a trust is the only way to achieve the goals because the beneficiary may be a minor child, a beneficiary that might be a spendthrift, or a beneficiary that is only intended to be a beneficiary for a period of time but someone else is the ultimate beneficiary. In those situations in which a trust must be used, extra care and caution must be taken to ensure that unintended tax consequences don’t result.

I never name a revocable living trust or an estate as the beneficiary. I name the named individuals or the testamentary trust created by the decedent’s Will or RLT as the beneficiaries. Naming the RLT or an estate, depending on the terms of the RLT or Will and the custodian of the retirement account, could result in recognizing all of the proceeds from the retirement account as income in the current year or spread out over a period of 5 years. The ability to “stretch” the IRA over the life expectancy of a beneficiary and only taking required minimum distributions during this life expectancy may be prohibited if the terms of the RLT or Will do not qualify.

If a Trust is the inherited beneficiary of a retirement account, and it is the goal of the Settlor for the retirement account to be stretched over the beneficiary’s life expectancy, the Trust must meet certain criteria: the trust must be valid under state law, the trust is irrevocable, the beneficiaries of the trust must be identifiable, the trust document must be presented to the plan administrator, and all trust beneficiaries must be individuals. One way to help ensure that the trust is qualified is to make the trust a conduit trust. A conduit trust requires the Trustee to distribute the RMD to the beneficiary each year. It does not allow the Trustee to accumulate distributions. This works well when the beneficiary is not a minor, is not disabled, or has no other limitations.

If the terms of the Trust do not make it a conduit trust, the terms of the trust should identify to what extent RMDs are principal and income. Though the IRS will treat all of an

Advanced Estate Planning and Administration 2016 5–6 Chapter 5—Is the Trust Funded?

RMD as income, unless the Trust states otherwise, for accounting purposes, an RMD will be both principal and income. The breakdown between principal and interest can make things difficult between the trustee, current income beneficiaries, and remainder beneficiaries. The Uniform Principal and Income Act offers guidance as to how to resolve this difficulty.

If there is more than one beneficiary of a Trust, the oldest beneficiary’s life expectancy will be used to determine RMDs. To avoid this consequence, set up a share or trust for each beneficiary, so their life expectancy can be used for RMD purposes instead of the age of the oldest beneficiary.

Advanced Estate Planning and Administration 2016 5–7 Chapter 5—Is the Trust Funded?

Advanced Estate Planning and Administration 2016 5–8 Chapter 5—Is the Trust Funded?

ALL INCLUSIVE ASSIGNMENT OF ASSETS TO TRUSTEE OF REVOCABLE LIVING TRUST

Dated as of:

Between: (“Assignor”)

And: (“Assignee”)

As of the date of this Assignment, Assignor hereby bargains, sells, transfers, assigns, conveys, and delivers to Assignee all of Assignor’s right, title and interest, in and to all real and personal property interests of any nature whatsoever and whether now owned or hereinafter acquired by Assignor, including without limitation any intangible personal property and information stored in any digital, internet, or computer-based format, together with all proceeds (including insurance proceeds) for any of the foregoing types of property.

Notwithstanding the above, this All Inclusive Assignment includes, but is not limited to, the following described assets:

Notwithstanding the above, this All Inclusive Assignment excludes, and does not transfer to the Trust, the following described assets:

, Assignor

State of Oregon ) ) ss. County of Multnomah )

On this day of , personally appeared the above-named , and acknowledged the foregoing instrument to be his/her voluntary act and deed. Before me.

Notary Public for Oregon

Advanced Estate Planning and Administration 2016 5–9 Chapter 5—Is the Trust Funded?

Advanced Estate Planning and Administration 2016 5–10 Chapter 5—Is the Trust Funded?

REAL ESTATE EXCISE TAX AFFIDAVIT 7KLVIRUPLV\RXUUHFHLSW 3/($6(7<3(2535,17 &+$37(55&:±&+$37(5$:$& ZKHQVWDPSHGE\FDVKLHU THIS AFFIDAVIT WILL NOT BE ACCEPTED UNLESS ALL AREAS ON ALL PAGES ARE FULLY COMPLETED 6HHEDFNRIODVWSDJHIRULQVWUXFWLRQV &KHFNER[LISDUWLDOVDOHRISURSHUW\ ,IPXOWLSOHRZQHUVOLVWSHUFHQWDJHRIRZQHUVKLSQH[WWRQDPH 1 1DPH 2 1DPH 0DLOLQJ$GGUHVV 0DLOLQJ$GGUHVV 6(//(5

&LW\6WDWH=LS %8<(5 &LW\6WDWH=LS *5$1725 *5$17(( 3KRQH1R LQFOXGLQJDUHDFRGH 3KRQH1R LQFOXGLQJDUHDFRGH /LVWDOOUHDODQGSHUVRQDOSURSHUW\WD[SDUFHODFFRXQW 3 6HQGDOOSURSHUW\WD[FRUUHVSRQGHQFHWR 6DPHDV%X\HU*UDQWHH /LVWDVVHVVHGYDOXH V QXPEHUV±FKHFNER[LISHUVRQDOSURSHUW\ 1DPH 0DLOLQJ$GGUHVV &LW\6WDWH=LS 3KRQH1R LQFOXGLQJDUHDFRGH

4 6WUHHWDGGUHVVRISURSHUW\ 7KLVSURSHUW\LVORFDWHGLQ Select Location &KHFNER[LIDQ\RIWKHOLVWHGSDUFHOVDUHEHLQJVHJUHJDWHGIURPDQRWKHUSDUFHODUHSDUWRIDERXQGDU\OLQHDGMXVWPHQWRUSDUFHOVEHLQJPHUJHG /HJDOGHVFULSWLRQRISURSHUW\ LIPRUHVSDFHLVQHHGHG\RXPD\DWWDFKDVHSDUDWHVKHHWWRHDFKSDJHRIWKHDIILGDYLW 5 6HOHFW/DQG8VH&RGH V 7 /LVWDOOSHUVRQDOSURSHUW\ WDQJLEOHDQGLQWDQJLEOH LQFOXGHGLQVHOOLQJ Select Land Use Codes SULFH HQWHUDQ\DGGLWLRQDOFRGHV 6HHEDFNRIODVWSDJHIRULQVWUXFWLRQV <(6 12 :DVWKHVHOOHUUHFHLYLQJDSURSHUW\WD[H[HPSWLRQRUGHIHUUDOXQGHU FKDSWHUVRU5&: QRQSURILWRUJDQL]DWLRQVHQLRU FLWL]HQRUGLVDEOHGSHUVRQKRPHRZQHUZLWKOLPLWHGLQFRPH " 6 ,IFODLPLQJDQH[HPSWLRQOLVW:$&QXPEHUDQGUHDVRQIRUH[HPSWLRQ <(6 12 ,VWKLVSURSHUW\GHVLJQDWHGDVIRUHVWODQGSHUFKDSWHU5&:" :$&1R 6HFWLRQ6XEVHFWLRQ ,VWKLVSURSHUW\FODVVLILHGDVFXUUHQWXVH RSHQVSDFHIDUPDQG 5HDVRQIRUH[HPSWLRQ DJULFXOWXUDORUWLPEHU ODQGSHUFKDSWHU" ,VWKLVSURSHUW\UHFHLYLQJVSHFLDOYDOXDWLRQDVKLVWRULFDOSURSHUW\ SHUFKDSWHU5&:"

,IDQ\DQVZHUVDUH\HVFRPSOHWHDVLQVWUXFWHGEHORZ 7\SHRI'RFXPHQW (1) NOTICE OF CONTINUANCE (FOREST LAND OR CURRENT USE) 1(:2:1(5 6 7RFRQWLQXHWKHFXUUHQWGHVLJQDWLRQDVIRUHVWODQGRU 'DWHRI'RFXPHQW FODVVLILFDWLRQDVFXUUHQWXVH RSHQVSDFHIDUPDQGDJULFXOWXUHRUWLPEHU ODQG you must sign on (3) below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sign (3) below,IWKHQHZRZQHU V GRHVQRWZLVKWRFRQWLQXHDOO 6WDWH7HFKQRORJ\)HH 5.00 DGGLWLRQDOWD[FDOFXODWHGSXUVXDQWWRFKDSWHU5&:VKDOOEHGXHDQG SD\DEOHE\WKHVHOOHURUWUDQVIHURUDWWKHWLPHRIVDOH $IILGDYLW3URFHVVLQJ)HH (3) OWNER(S) SIGNATURE 7RWDO'XH 10.00 PRINT NAME A MINIMUM OF $10.00 IS DUE IN FEE(S) AND/OR TAX 6((,16758&7,216

8 I CERTIFY UNDER PENALTY OF PERJURY THAT THE FOREGOING IS TRUE AND CORRECT. 6LJQDWXUHRI 6LJQDWXUHRI Grantor or Grantor’s Agent Grantee or Grantee’s Agent 1DPH SULQW 1DPH SULQW 'DWH FLW\RIVLJQLQJ 'DWH FLW\RIVLJQLQJ

Perjury:3HUMXU\LVDFODVV&IHORQ\ZKLFKLVSXQLVKDEOHE\LPSULVRQPHQWLQWKHVWDWHFRUUHFWLRQDOLQVWLWXWLRQIRUDPD[LPXPWHUPRIQRWPRUHWKDQILYH\HDUVRUE\ DILQHLQDQDPRXQWIL[HGE\WKHFRXUWRIQRWPRUHWKDQILYHWKRXVDQGGROODUV RUE\ERWKLPSULVRQPHQWDQGILQH 5&:$ & 5(9D 7+,663$&(75($685(5¶686(21/< 7$;3$<(5

Advanced Estate Planning and Administration 2016 5–11 Chapter 5—Is the Trust Funded?

INSTRUCTIONS Note:7RUHSRUWDWUDQVIHURIDFRQWUROOLQJLQWHUHVWLQUHDOSURSHUW\SOHDVHXVHWKH5HDO(VWDWH([FLVH7D[$IILGDYLW&RQWUROOLQJ,QWHUHVW7UDQVIHU5HWXUQ 5HYHQXH)RUP1R%7KLVIRUPLVDYDLODEOHRQOLQHDWKWWSGRUZDJRY Section 1: (QWHUWKHQDPH V RIVHOOHUJUDQWRU7KLVLVWKHSHUVRQ V FRQYH\LQJLQWHUHVWLQWKHSURSHUW\ Section 2: (QWHUWKHQDPH V RIEX\HUJUDQWHH7KLVLVWKHSHUVRQ V UHFHLYLQJLQWHUHVWLQWKHSURSHUW\ Section 3: (QWHUWKHname and addressZKHUH\RXZRXOGOLNHDOOIXWXUHSURSHUW\WD[LQIRUPDWLRQVHQW (QWHUWKHtax parcel numberDQGcurrent assessed valueIRUrealDQGpersonal propertyEHLQJFRQYH\HG&KHFNWKHER[WRLQGLFDWHSHUVRQDO SURSHUW\ Section 4: (QWHUWKHVWUHHWDGGUHVVRIWKHSURSHUW\ (QWHUWKHFRXQW\LILQXQLQFRUSRUDWHGDUHD(QWHUFLW\QDPHLIORFDWHGZLWKLQDPXQLFLSDOLW\ (QWHUWKHOHJDOGHVFULSWLRQRIWKHSURSHUW\ Section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ection 6: ,QGLFDWHZKHWKHUWKHSURSHUW\LVGHVLJQDWHGDVIRUHVWODQGSHUFKDSWHU5&:FODVVLILHGDVFXUUHQWXVH RSHQVSDFHIDUPDJULFXOWXUDORU WLPEHU SHUFKDSWHU5&:RUUHFHLYLQJVSHFLDOYDOXDWLRQDVKLVWRULFSURSHUW\SHUFKDSWHU5&: Section 7: x /LVWpersonal propertyLQFOXGHGLQWKHVHOOLQJSULFHRIWKHUHDOSURSHUW\)RUH[DPSOHLQFOXGHWDQJLEOH IXUQLWXUHHTXLSPHQWHWF DQG LQWDQJLEOH JRRGZLOODJUHHPHQWQRWWRFRPSHWHHWF x Use TaxLVGXHRQSHUVRQDOSURSHUW\SXUFKDVHGZLWKRXWSD\PHQWRIWKHVDOHVWD[8VH7D[PD\EHUHSRUWHGRQ\RXU&RPELQHG([FLVH7D[ 5HWXUQRUD&RQVXPHU8VH7D[5HWXUQERWKDYDLODEOHDWKWWSGRUZDJRY x ,I\RXDUHFODLPLQJDtax exemptionFLWHWKHVSHFLILF:DVKLQJWRQ$GPLQLVWUDWLYH&RGH :$& QXPEHUVHFWLRQDQGVXEVHFWLRQDQG SURYLGHDEULHIH[SODQDWLRQ0RVWWD[H[HPSWLRQVUHTXLUHVSHFLILFGRFXPHQWDWLRQ5HIHUWRWKHDSSURSULDWH:$&WRGHWHUPLQH GRFXPHQWDWLRQUHTXLUHPHQWV&KDSWHU$:$&LVDYDLODEOHRQOLQHDWKWWSGRUZDJRY x (QWHUWKHtype of document TXLWFODLPGHHGVWDWXWRU\ZDUUDQW\GHHGHWF DQGdate of document 00''<<<< x (QWHUWKHselling priceRIWKHSURSHUW\ x Selling price:)RUWD[SXUSRVHVWKHVHOOLQJSULFHLVWKHWUXHDQGIDLUYDOXHRIWKHSURSHUW\FRQYH\HG:KHQSURSHUW\LVFRQYH\HGLQDQDUP¶V OHQJWKWUDQVDFWLRQEHWZHHQXQUHODWHGSHUVRQVIRUYDOXDEOHFRQVLGHUDWLRQWKHUHLVDSUHVXPSWLRQWKDWWKHVHOOLQJSULFHLVHTXDOWRWKHWRWDO FRQVLGHUDWLRQSDLGRUFRQWUDFWHGWREHSDLGLQFOXGLQJDQ\LQGHEWHGQHVV5HIHUWR5&:IRUPRUHLQIRUPDWLRQDERXWVHOOLQJSULFH x DeductWKHDPRXQWRIpersonal propertyLQFOXGHGLQWKHVHOOLQJSULFH x DeductWKHDPRXQWRItax exemptionFODLPHGSHUFKDSWHU$:$& x Due Date, Interest and Penalties:7D[LVGXHDWWKHWLPHRIVDOHWUDQVIHU,IWD[LVQRWSDLGZLWKLQRQHPRQWKRIWKHGDWHRIVDOHWUDQVIHU LQWHUHVWDQGSHQDOWLHVZLOODSSO\7KHLQWHUHVWUDWHLVYDULDEOHDQGGHWHUPLQHGSHU5&:'HOLQTXHQWSHQDOWLHVDUHRQHPRQWK DIWHUWKHGXHGDWHWZRPRQWKVDIWHUWKHGXHGDWHDQGWKUHHPRQWKVDIWHUWKHGXHGDWH 5&: x State Technology Fee:$(OHFWURQLF7HFKQRORJ\)HHWKDWLVGXHRQDOOWUDQVDFWLRQV x Affidavit Processing Fee:$PLQLPXPRIVKDOOEHFROOHFWHGLQWKHIRUPRIWD[DQGSURFHVVLQJIHH$SURFHVVLQJIHHLVGXHRQDOO WUDQVDFWLRQVZKHUHQRWD[LVGXHDQGRQDOOWD[DEOHWUDQVDFWLRQVZKHUHWKHWD[GXHLVOHVVWKDQ 5&: Section 8: %RWKJUDQWRU VHOOHU DQGJUDQWHH EX\HU RUWKHDJHQWRIHDFKPXVWVLJQWKLVIRUPFHUWLI\LQJWKDWDOOWKHLQIRUPDWLRQSURYLGHGLVFRUUHFW1RWH 2ULJLQDOVLJQDWXUHVUHTXLUHGRQWKH³&RXQW\7UHDVXUHU´FRS\6LJQDWXUHVPD\EHUHTXLUHGRQWKH³$VVHVVRUV´FRS\&KHFNZLWK\RXUFRXQW\ Audit: ,QIRUPDWLRQ\RXSURYLGHRQWKLVIRUPLVVXEMHFWWRDXGLWE\WKH'HSDUWPHQWRI5HYHQXH8QGHUSD\PHQWVRIWD[ZLOOUHVXOWLQWKHLVVXDQFHRIDWD[ DVVHVVPHQWZLWKLQWHUHVWDQGSHQDOWLHV1RWHLQWKHHYHQWRIDQDXGLWLWLVWKHWD[SD\HUV¶UHVSRQVLELOLW\WRSURYLGHGRFXPHQWDWLRQWRVXSSRUWWKH VHOOLQJSULFHRUDQ\H[HPSWLRQFODLPHGThis documentation must be maintained for a minimum of four years from date of sale. (RCW 82.45.100) Ruling requests:

Advanced Estate Planning and Administration 2016 5–12 Chapter 5—Is the Trust Funded? Application for Exemption from Washington County Transfer Tax

Transfers of real property for which the selling price is thirteen thousand nine hundred ninety-nine dollars ($13,999.00.) or less. 3.04.030J.13.

I, ______being first duly sworn, say that I am the (Grantor) (Grantee) (other) ______. That the transfer of the property recorded as document number ______is exempt under the tax pursuant to the following exemption and required information.

Required Information:

1) The real market value of the real property on the tax roll of the county on the date of the sale. ______

2) A consideration of less than $13,999 is stated on your transfer. State the nature of all other consideration involved in the transaction, including other property given in trade and any amount assumed by the buyer (grantee) of the seller’s (grantor’s) debt. ______

3) If sold for less than the real market value, since the value is greater than the sale price, state if the difference is a gift. If not, give an explanation of the difference in price. If the difference is a gift, then provide the required information under 3.04.030J.16.. ______

4) For documents that are no consideration transfers, state all the names and legal entities of the grantors or sellers. ______

5) For documents that are no consideration transfers, state all the names and legal entities of the grantees or buyers. ______

No additional consideration was given for this transfer. I understand that this information is available for inspection by the Internal Revenue Service and The Oregon State Department of Revenue. (Signature) ______State of ______County of ______Sworn and subscribed to before me this ______day of ______, 20______. ______Notary Public for Oregon My Commission Expires ______

[as of 2-4-1999]

Advanced Estate Planning and Administration 2016 5–13 Chapter 5—Is the Trust Funded?

Exemption 3.04.030J.13. Transfers of real property for which the selling price is thirteen thousand nine hundred ninety-nine dollars ($13,999.00.) or less. Exemption Guidelines This exemption is intended for the transfer of property which has a real market value of $13,999 or less and the sale is an arms length transaction; by its definition, selling price includes any indebtedness or encumbrance to which the property remains subject. This exemption also applies for no consideration transfers. A rebuttable presumption exists that the consideration involved in the sale or transfer is the amount of the real market value of the property on the county real property tax rolls at the time of the sale. This presumption may be rebutted by an independent appraisal of the property or evidence that the transaction was at arms length, such as a real estate listing agreement. No Consideration transfers Legal Counsel General Rule: Consideration is exchanged whenever the property is transferred between one legal entity and another. A rebuttable presumption exists that the value is at least the real market value of the property at the time of the transfer. Exceptions to General Rule: Transfers between two legal entities may involve no consideration if the individuals who have title before the transfer are the same individuals who have title after the transfer and have the same beneficial ownership in the property both before and after the transfer. This only applies when the legal entity constitutes a natural person for legal purposes (liability and taxation). The exception is a limited liability company, partnership or other legal entity where natural persons were taxed as individuals and continue to be taxed as individuals with the same beneficial ownership after the transfer. The legal entities to which this applies includes but is not limited to: Natural Persons, Spouses with Tenancies by the Entirety, Partnerships, Limited Liability Companies (when taxed as a partnership), Trusts, and DBAs. Washington County Transfer Tax (Chapter 3.04 Washington County Code) Washington County “Real Property Transfer Tax Ordinance” requires that all transfers of real property be taxed based on the selling price or file for an exemption. The tax is one dollar per thousand of the “selling price”. Definitions: “Selling Price” means the consideration, in money or any other thing of value which is paid, delivered, or contracted to be paid or delivered, in return for the transfer of real property. “Selling Price” shall include the amount of cash and the amount of any lien, mortgage, contract, indebtedness or any encumbrance existing against the property to which the property remains subject and which the purchaser agrees to pay or assume, as stated pursuant to ORS 93.030 on the face of any instrument conveying or contracting to convey fee title to real property. However, “selling price” also includes other property or value given or promised for the transfer of real property if such other property or value were either part or the whole consideration. “Transfer of Real Property” means and includes every grant, sale, exchange, assignment, quitclaim or other conveyance of property in or title to real property, and also means and includes any contract for sale, exchange, grant, assignment, quitclaim or other conveyance of ownership in or title to real property. Notwithstanding this, “transfer of real property” does not include instruments clearly shown on their face to be the following: J.1. Estoppel Deeds; J.2. Deeds in lieu of foreclosure and all transfers of real property effected by order of any court of competent jurisdiction in a mortgage or lien foreclosure proceeding, proceeding for execution of a judgment, bankruptcy proceeding, or receivership proceeding; J.3. Vendor’s assignments and all transfers or assignments of a seller’s interest in a contract for the sale of real property even though accompanied by a conveyance of the seller’s interest in the real property; J.4. Earnest money agreements; J.5. Sheriff’s deeds; J.6. Options; J.7. Trustee’s deed as a result of foreclosure; J.8. Conveyance to or from a government entity; J.9. Re-recording of documents; J.10. Fulfillment deeds; J.11. Documents recorded solely for security purposes; J.12. Transfers of real property affected by appropriation or condemnation proceedings brought by the United States, the State of Oregon, the county, or any municipal or non-profit corporation; J.13. Transfers of real property for which the selling price is thirteen thousand nine hundred ninety-nine dollars ($13,999.00.) or less; J.14. Transfers of real property to effect a mere change in identity, form or place of organization; J.15. Transfers of real property to effect the dissolution of a corporation, partnership, or joint venture; J.16. Transfers of real property by gift, devise, or inheritance; J.17. Transfers of grave or cemetery lot; or J.18. Transfers of real property between spouses effected by order of any court of competent jurisdiction in a marriage dissolution or separation proceeding. Failure to pay the tax or file for an exemption within the fifteen (15) days from the date of recording will result in an automatic penalty equal to the amount of the tax owed or $50.00, whichever is greater. Interest shall accrue on the delinquent tax at a rate of 1½% per month until paid. A party may in writing to the director request a fifteen (15) day extension in which to pay the tax or file for an exemption. The director may approve no more than two (2) extensions. If a transfer of real property is transfer tax exempt, an application for an allowed exemption must be served, in writing , upon the Washington County Director of Assessment and Taxation within fifteen (15) days of the date of tender of the documents to the county for recording purposes. Failure to file for an allowed exemption within fifteen (15) days will result in the transfer being taxed no matter what exemption is claimed. When any person fails to pay the tax or file for an exemption within the time provided for payment of the tax, there shall be a conclusive presumption, for purposes of computation of the tax, that the selling price is not less than the real market value as defined by ORS 308.205, as determined by the Washington County Department of Assessment and Taxation.

[as of 12-21-1998]

Department of Assessment and Taxation S Cartography and Recording Division 155 North First Avenue, Suite 130, MS 9, Hillsboro, OR 97124-3072 Phone: (503) 846-8752 S Fax: (503) 846-3909

Advanced Estate Planning and Administration 2016 5–14 Chapter 5—Is the Trust Funded?

Advanced Estate Planning and Administration 2016 5–15 Chapter 5—Is the Trust Funded?

Advanced Estate Planning and Administration 2016 5–16 Chapter 6 Using Mediation and Arbitration to Manage Family Conflict and Resolve Trust and Estate Disputes

Professor Susan Gary University of Oregon School of Law Eugene, Oregon

Contents I. Growth in Use of Mediation in Trusts and Estates 6–1 II. Benefits and Challenges 6–1 A. Benefits ...... 6–1 B. Challenges ...... 6–3 III. Family Discussions as Part of the Estate Planning Process ...... 6–4 A. Values and Relationships ...... 6–4 B. Family Meeting 6–4 C. Family Business ...... 6–6 D. Family Property—Vacation Home or Farmland ...... 6–7 E. Side Letter—For Clients Afraid of the Family Discussion 6–8 IV. Will a Court Enforce a Mediation or Arbitration Clause? ...... 6–8 A. Recent Cases ...... 6–8 B. Statutes That Enforce Clauses ...... 6–9 C. Other Statutes Related to Probate or Trust Disputes 6–12 D. Other Benefits of Including Clauses in Documents ...... 6–12 V. Sample Clauses and Drafting Suggestions ...... 6–13 A. George Washington—Arbitration ...... 6–13 B. Issues to Consider ...... 6–13 C. Precatory Clause ...... 6–14 D. Precatory Mediation Clause Coupled with Arbitration Clause 6–14 E. Combining a Mediation Clause with an In Terrorem Clause ...... 6–15 F. Mediating in “Good Faith” ...... 6–18 G. A Clause to Protect Future Documents—In Terrorem Clause to Encourage Mediation of a Future Document ...... 6–18 H. Incentives 6–18 I. ACTEC Sample Clauses from the Report of the ACTEC Arbitration Task Force (2006) ...... 6–20 VI. Use of Mediation in Issues Involving Elder Family Members ...... 6–20 Chapter 6—Using Mediation and Arbitration

Advanced Estate Planning and Administration 2016 6–ii Chapter 6—Using Mediation and Arbitration

I. Growth in Use of Mediation and Arbitration in Trusts and Estates

In the years since the turn of the century, the use of mediation in the probate context and also at the estate planning stage has increased. Estate planning and administration lawyers have a better sense of the benefits of mediation. Estate and trust litigators are used to representing clients in mediation. Panels at ACTEC and RPTE meetings have discussed mediation and arbitration in the trust and estates contexts, and most trust and estate lawyers have a general sense of how mediation works and why it can be effective in connection with trust and estate disputes. Articles in law reviews and bar journals have discussed issues relating to mediation in this context. See Appendix A for a list of resources.

In county courts around the country, judges increasingly require or encourage the use of mediation in connection with probate matters. A growing number of states have adopted statutes regulating the use of mediation or arbitration in connection with trust and estate disputes.

Five states, Arizona, Florida, Missouri, Nevada, and New Hampshire now have arbitration statutes that include trust and probate disputes, and a recent Texas case enforced an arbitration clause.

Mediation or arbitration will be an appropriate process for the resolution of some disputes but not others. There are benefits, both financial and emotional, to both of these . In some situations, litigation, negotiated settlement or arbitration will yield better results for the clients. But both of these tools

This outline begins with a brief description of the benefits and challenges of using mediation in this area of the law. The outline then discusses strategies to use during planning, including family meetings and special tactics when a family business is involved. The outline concludes with sample clauses for wills or trusts.

II. Benefits and Challenges

A. Benefits

1. Privacy and Confidentiality

Matters discussed in estate planning are often personal. Family relationships, past disagreements, and all sorts of “dirty laundry” may be better discussed in private. In litigation, documents and hearings are public record. Mediation protects privacy. The degree of privacy and confidentiality depends on the agreement of the participants and in some states on state law, including state evidentiary rules.

The promise of privacy provides an additional benefit in that participants in a mediation may be willing to speak more freely, air grievances more openly, and generate solutions more creatively.

Advanced Estate Planning and Administration 2016 6–1 Chapter 6—Using Mediation and Arbitration

2. Emotional Benefits

In litigation, the parties define their dispute in legal terms, and the decision reached addresses the legal questions involved. In mediation, the participants can discuss emotional issues, which in some situations lie at the heart of the dispute. A participant who can share with family members the pain behind the dispute may benefit just from being able to discuss her views openly. Hearing that “Mom loved you and always talked about how successful you were” may be more important than getting a bigger share of the estate. Indeed, for some participants the opportunity to explain past hurts, to hear an apology, or to get an explanation for behavior the participant found upsetting, may be more important than winning a dispute on legal grounds.

The process of mediating a dispute may teach family members how to communicate with each other. Frayed relationships may be mended, or at least the participants may develop a strategy for improving those relationships. The participants may be more satisfied with the resolution of the dispute if they get to control the outcome. A resolution of the dispute may allow the participants to move on and leave anger and past tensions behind.

In addition to potential positive emotional benefits, participants may avoid some of the emotional costs of litigation. The litigation process creates stress and anxiety that will affect all parties, including the victorious side. If the dispute involves family members, the emotional pain may be exacerbated by litigation, and even the winner may suffer from the difficult process as well as from the broken relationships.

3. Ongoing Relationships

Mediation can repair, maintain, or improve ongoing relationships, and that makes its use particularly appropriate in the estate planning context. In mediation participants work together to solve a problem. The mediator will assist them in understanding each other's views of the problem and will help them learn to communicate with each other. The experience of working together in mediation may teach the participants communication skills they can use beyond the resolution of the dispute.

Through litigation parties may become entrenched in their positions and may view a successful outcome as a win for one party and a loss for the other. Even relationships that existed before litigation may be irrevocably broken through the litigation process.

4. Unique and Flexible Solutions

In mediation the participants work together to create the solution to the dispute that will best serve their needs, both legal and non-legal. The settlement may involve money damages or the distribution of property under a will or trust, but it may also take into consideration non-legal interests. An apology, the ability to choose which of Grandmother’s paintings to take, or decisions on when family members will use the family vacation house, may be more important than the legal resolution of the dispute. A settlement agreement can

Advanced Estate Planning and Administration 2016 6–2 Chapter 6—Using Mediation and Arbitration

provide something for each of the participants, unlike the win-lose result of a litigated will contest.1

5. Financial Costs

Mediation is not always less expensive than litigation, but typically the use of mediation will result in savings over a litigated resolution of the dispute. If the parties attempt mediation and cannot reach agreement, the cost of the mediation will be added to the costs of litigation and the overall cost may be greater. In cases in which participants can reach a settlement, however, the family will likely save money. If the dispute involves an estate of limited financial value, mediation may allow family members to resolve the dispute without unduly reducing the estate by the costs of litigation. Even if the mediation does not result in a settlement, agreement on some issues or on the scope of the litigation may reduce the costs of the litigation.

B. Challenges

1. Grief

If the dispute arises after the death of a family member, grief over the death will affect the resolution of the dispute. Grief may be a factor in the dispute itself, because the desire to blame someone for the death of a loved one may lead to a lawsuit. Grief will also affect the participants’ abilities to mediate. The effect of grief on the participants may suggest delaying the mediation until the participants have progressed through some stages of the grieving process, but a long delay can result in increasingly entrenched positions and can make mediation more difficult.

2. Power Imbalance

Family members have different levels of power within the family, and issues of age- related disabilities or domestic abuse can affect participants to a mediation. If the mediation involves an older family member, concerns about capacity must be addressed. In addition, an older family member who is weak physically may feel bullied by members of a younger generation, especially is the older person is a second spouse and conflict has always existed between the second spouse and the children from the first marriage. Siblings may have a history that includes the dominance by one sibling over another, and those patterns may be difficult to recognize and address. Family members may have different levels of financial or legal sophistication. In some situations the interests of minor family members may be at

1 In Creative Settlements in Fiduciary Litigation, Gerald Le Van began with these statements: “The most creative fiduciary settlements always respect and often leverage the clients’ most important relationships. Increasingly, clients are seeking out those advisors and fiduciaries that support rather than threaten their most important relationships. In my opinion, therefore, the future of fiduciary practice belongs to those advisors and fiduciaries who earn that client perception.” www.uww-adr.com.

Advanced Estate Planning and Administration 2016 6–3 Chapter 6—Using Mediation and Arbitration

stake. An adult participant may be able to represent those interests, but in some situations minor children may need separate representation.

A skilled mediator will be able to recognize and manage power imbalances. A lawyer who represents a client in a situation in which a power imbalance is a concern should pay particular attention in the choice of mediator to be sure the mediator will be able to manage the imbalance. The lawyer may also need to take a more active role if her client is at a disadvantage with respect to family dynamics.

3. Long-Term Dispute

The underlying dispute in a probate matter may be a family feud that has developed over many years. Siblings may have never gotten along; children may have always resented their father’s second wife. Although mediation may still be of help to family members, the more entrenched parties are in their positions, the less likely it will be that mediation will be successful.

III. Family Discussions as Part of the Estate Planning Process

A. Values and Relationships

At the beginning of the estate planning process, the lawyer can ask the client about her values2 and about the relationships in her family.3 The lawyer will be better able to develop an estate plan that carries out the client’s wishes if the lawyer learns about family dynamics that may lead to conflict later on. If the estate planner uncovers potential conflict, the lawyer can consider several strategies to minimize or address the conflict. The goal is a happier, more satisfied client, who can feel assured that her wishes will not be disrupted by post-death litigation.

B. Family Meeting

A meeting of family members while the testator or settlor is alive may help to avoid or minimize conflict after the patriarch or matriarch’s death. Such a meeting may be difficult for the senior family member, who may be tempted to avoid the conflict and let the children deal with it later. A thoughtful lawyer may be able to encourage the client to meet by explaining that a family meeting may allow her to protect her wishes and to leave a legacy of family communication rather than family discord.

2 Conversation with Kim Kamin, Jan. 30, 2013. 3 See Gerald Le Van, A Family Council for the “Relational Estate” (July 2008), available at www.uww-adr.com. Mr. Le Van describes the relational estate of a business family as follows: “It includes genes, history and heritage. It encompasses the whole web of interpersonal relationships that connects them across generations. Their relational estate continues to include even deceased family members.” Id.

Advanced Estate Planning and Administration 2016 6–4 Chapter 6—Using Mediation and Arbitration

A lawyer acting alone, even a very good lawyer, may not be the appropriate person to conduct the family meeting for two reasons. Strict conflict of interest rules mean that the lawyer can represent only her client and not other family members, absent signed waivers of the potential conflicts.4 Even if family members willingly sign waivers at the outset, unhappiness over the result of the meeting could lead to dissatisfaction with the process and a refusal to sign a settlement agreement. Absent separate representation some family members may feel “taken advantage of” by the process.5

A related concern is that if the family agrees that the lawyer represents each of them, then the information shared during the family meeting will be confidential to anyone outside the meeting, but anything the lawyer-facilitator learns from an individual family member must be shared with the others. Individual disclosures to a mediator may prove useful in building a governance structure for the family or working to resolve any number of family wealth issues, and only a neutral can serve in the role of confidant for family members without disclosing the information.

The second reason for bringing in a trained facilitator is that estate planning lawyers may be used to advising clients about tax matters or business matters and may not be trained to listen for emotional cues or to encourage conversation about underlying emotional conflict.6 A person trained in mediation or counseling may be better able to manage the meeting, and the lawyer can then serve as a resource on legal or financial issues. The family members may be more willing to discuss their concerns with a third-party neutral, whom they should perceive as a neutral facilitator and not as someone representing the testator or settlor.

A lawyer can address the concerns about conflicts of interest and facilitation skills by arranging for the family to meet with a mediator who can facilitate the discussion. The family meeting can be an all-day retreat or a series of meetings, depending on the availability of family members and the topics for discussion. In the family meeting, the participants can discuss relationship issues as well as property issues. The lawyer can provide legal and financial information as needed, perhaps with assistance from the client’s accountant or other professionals involved in the planning. Ultimately the lawyer will draft the estate planning documents for the senior family members. In some situations the clients may change their plans based on the discussions, if they learn things about the children’s wishes or interests

4 See Mary F. Radford, Advantages and Disadvantages of Mediation in Probate, Trust, and Guardianship Matters , 1 P EPP . DISP. RESOL. L.J. 241, 251 (2001). Roselyn Friedman and Erica Lord note that the ABA Model Rules of Professional Conduct make it difficult for a lawyer to represent multiple generations in a family, as estate planning lawyers used to do. They explain: “Model Rule of Professional Conduct 1.7 provides that, without a client's informed consent, a lawyer may not represent a client if that representation will be ‘directly adverse‘ to another client or will ‘materially limit‘ the lawyer's responsibility to another client, a third person, or the lawyer's own interests.” Roselyn L. Friedman & Erica E. Lord, Using Facilitative Mediation in an Estate Planning Practice, 32 EST. PLAN. 15 (2005). 5 See Radford, supra note 4, at 251. 6 See id.

Advanced Estate Planning and Administration 2016 6–5 Chapter 6—Using Mediation and Arbitration

with respect to the property that affect the planning. In other situations the family meeting will not alter the dispositive plan, but the children will gain an understanding of the decisions their parents made about their property. In either case, conflict after death will be less likely if all family members understand the reasons behind the estate plan.7

The lawyer and client will have to decide who should attend the facilitated meeting, and whether one meeting with all affected parties or a series of meetings with expanding groups of family members would be better. Spouses of family members may be included or not. Sometimes spouses can be disruptive, but other times their involvement and influence will be important to reaching understanding and agreement.

C. Family Business

A family meeting to discuss a parent’s dispositive wishes may be particularly important when the family wealth involves a family business. Some children or other relatives may work in the business and some may not, and their concepts of a “fair” distribution of the parent’s estate may differ as a result. Children who work in the business may expect to control the business after their parents’ death, either through an unequal distribution of shares in the business or through an organization of the business that gives them voting rights while their non-involved siblings receive non-voting interests. If the family can address the issues of control and fairness while the parents are alive, the children will understand the parents’ reasons for their decisions, and all family members may be able to reach an agreement that satisfies the parents, the children who work in the business and the children who are not directly involved in the business.8

Indeed, the future of the business as an ongoing, family-controlled entity may depend on the ability of the family to reach agreement on succession and control. If some family members work in the business and some do not, the family will need to address issues of control and financial resources. Non-active family members may want dividends or other distributions from the business or may even want to sell the business and reinvest the proceeds in passive investments. Active family members may want to reinvest profits in the business, to build and grow the business. Particularly if their children are likely to continue in the business, their priorities may be to leave as much of the wealth in the business as possible.

7 See Jonathan G. Blattmachr, Reducing Estate and Trust Litigation through Disclosure, In Terrorem Clauses, Mediation and Arbitration, 9 CARDOZO J. CONFLICT RESOL. 237, 248 (2008) (explaining that a child with a sense of entitlement about a share of an estate may contest the will if the child is disappointed and does not understand the decision made by a parent) 8 Gerald Le Van, THE SURVIVAL GUIDE FOR BUSINESS FAMILIES. Mr. Le Van was an ACTEC Fellow who developed a mediation practice focused on helping business families. Many of his articles are posted on the website of the firm Upchurch, Watson, White and Max: www.uww-adr.com.

Advanced Estate Planning and Administration 2016 6–6 Chapter 6—Using Mediation and Arbitration

In connection with their estate planning, the matriarch and patriarch may want to leave shares of the business in a trust or trusts. If one daughter serves as trustee and controls the right to vote the shares, the other children may resent her control and be suspicious of her actions. She will be in a conflict of interest situation, and if disagreements develop around her position of control, her position as trustee may be challenged. If that daughter is also named CEO of the business, the possibility of disagreements increases. Family meetings held on an ongoing basis can provide a way to discuss the business, the needs and wishes of all family members, and the appropriate structure for control.

As a family business continues into the second and third generations, the interests of extended family members become more complex. Cousins may not know each other as well as the siblings did and may have different views about the best way forward. Spouses can play an important role in the views of the family members and may need to be included in the meetings.

Although a lawyer may offer to handle the meeting herself, the advantage of having a third-party neutral – a mediator – conduct the meeting is that the meeting can be conducted within the confidentiality rules that apply to mediation and the parties may be more willing to talk openly. Each party may have his own lawyer, and if so, it will be helpful if the lawyers approach the meeting in a collaborative manner. The advantage of having each party separately represented is that parties are less likely to feel taken advantage of and more likely to respect an agreement. The parties may be able to enter into an enforceable settlement agreement, depending on the issues discussed and agreement reached. Separate representation will make enforceability more likely.9

Although a third-party neutral should help parties feel comfortable about sharing concerns, in some cases family members may still be reluctant to voice issues involving longstanding grievances or slights. An adult child may be embarrassed to raise childhood issues in front of his parents or may worry that the mediator will “judge” him for complaining about something he perceived as unfair.10 Nonetheless, a skilled mediator may be able to overcome a participant’s reluctance to talk openly about issues that should be discussed.

D. Family Property – Vacation Home or Farmland

A mediated discussion could be useful to plan for the disposition of a single asset such as the family vacation home or land that has been owned by the family for several generations.11 The senior generation may want to preserve the vacation home or land and

9 Paul Fisher, The Power Tools of Estate Conflict Management, Recharging the Culture of Estate Conflicts, Part 2 , 24 P ROB . & PROP. 42, 44 (Jul./Aug. 2010). 10 Gary D. Williams, Weighing the Costs and Benefits of Mediating Estate Planning Issues before Disputes between Family Members Arise: The Scale Tips in Favor of Mediation, 16 OHIO ST. J. ON DISP. RESOL. 819, 846 (2001). 11 See Melissa Street, A Holistic Approach to Estate Planning: Paramount in Protecting Your Family, Your Wealth, and Your Legacy, 7 PEPP. DISP. RESOL. L.J. 141, 150 (2007).

Advanced Estate Planning and Administration 2016 6–7 Chapter 6—Using Mediation and Arbitration

may not realize that the children are less interesting in keeping the property intact. Alternatively one child may want the property to stay “in the family” but the other child may not, or the children may disagree on how to use the vacation house. A mediated discussion can help the family raise and then address these issues, before the different wishes become actual conflict. The process will educate the lawyer about the needs of the client and enable the lawyer to do a better job of protecting the client’s interests, both property-related interests and interests related to the family legacy the client wants to leave. The insights gained through the family meeting can inform the estate planning documents.

The use of family meetings and facilitated discussions, sometimes called “holistic estate planning,” may be more appealing to baby boomers than to their parents.12 As the baby boom generation begins to think more about the transfer of their property at death (the oldest boomers have passed age 65), these discussions may become increasingly common as part of estate planning services.

E. Side Letter – for Clients Afraid of the Family Discussion

If a client expects family members to be disappointed or angry about the disposition of his estate, the lawyer may suggest that the client write a side letter, explaining the decisions made in connection with the property distribution.13 The side letter, in the client’s own words, can explain why one child received more property, can express appreciation for assistance provided to the testator by that child, can express the testator’s love for all his children, or can explain the reasons for that led to the disinheritance of a child or other family member.

Although side letters can be helpful in some circumstances, a side letter might be used as evidence of undue influence. A testator’s side letter expressing his appreciation for care his same-sex partner had provided could be used as evidence of the partner’s influence over the testator if the testator’s parents did not approve of the partner. And if the letter contains mistaken beliefs about a disinherited family member, the letter could suggest a lack of capacity or insane delusion.

IV. Will a Court Enforce a Mediation or Arbitration Clause?

A. Recent Cases

An agreement to arbitrate is enforceable as a contract, and parties to a dispute can agree to submit to arbitration. A question that remains unsettle in most states is whether a settlor or testator can bind a beneficiary to arbitrate a dispute that arises in connection with the trust or will.

12 David Gage, John Gromala, Edward Kopf, Holistic Estate Planning and Integrating Mediation in the Planning Process , 39 REAL PROP., PROB. & TR. J. 509, 512 (2004). 13 See Fisher, supra note 9, at 43 (describing intent letters and stating, “Often it is that which is not said that leads to trouble.”).

Advanced Estate Planning and Administration 2016 6–8 Chapter 6—Using Mediation and Arbitration

1. In re Fellman, 412 Pa. Super. 577, 604 A. 2d 263 (1992)

A Pennsylvania case refused to permit the arbitration of the issue of the settlor’s competency in connection with a revocable trust. The court ruled that “as a matter of public policy issues of incompetency cannot be submitted to arbitration.”

2. Schoneberger v. Oelze, 208 Ariz. 591 (Az. Ct. App. 2004)

The Arizona Court of Appeals refused to enforce an arbitration provision in a trust because enforcement depends on a contract, and a trust is not a contract. Arizona has changed this result by statute.

3. Rachal v. Reitz, 403 S.W.3d 840 (Tex. 2013)

The Supreme Court of Texas held an arbitration clause in a revocable trust binding on the beneficiaries of the trust after the settlor’s death. The trust instrument included a clause requiring arbitration of any dispute. A beneficiary sued the trustee for breach of trust, and validity of the creation of the trust was not at issue. The court applied the doctrine of direct benefits estoppel. The beneficiary could not seek to enforce part of the trust and at the same time refuse to be bound by the mandatory arbitration provision. The court found the clause binding on a beneficiary because the beneficiary had accepted benefits from the trust. The court also explained that the clause represented the settlor’s intent and the court’s role was to enforce that intent.

4. McArthur v. McArthur, 224 Cal.App. 4th 651 (2014)

A California court of appeals refused to enforce an arbitration clause when a beneficiary challenged the validity of the document that included the arbitration clause. A woman had executed an amendment to her revocable trust, changing the distribution to favor one child over the other two children and adding an arbitration clause. One of the children, a beneficiary under the trust, challenged the validity of the trust amendment. She alleged undue influence and lack of capacity, and sought to have the trust amendment invalidated. The court found that the beneficiary had not accepted benefits of the trust, either expressly or impliedly, and thus distinguished the case from Rachal v. Reitz. The court also noted that a trust is not a contract and the beneficiary should not be treated as a third party beneficiary of a contract for purposes of applying the arbitration clause.

B. Statutes Providing for Enforcement

Five states have statutes providing for the enforcement of clauses. The Florida and Nevada statutes apply to clauses in wills and trusts, while the Arizona, Missouri, and New Hampshire statutes apply only to trusts. The Florida and Nevada statutes enforce arbitration clauses, Missouri covers both mediation and arbitration, Arizona says the settlor can provide for “mandatory, exclusive and reasonable procedures,” and New Hampshire will enforce a clause providing for “reasonable nonjudicial procedures.” New Hampshire specifically

Advanced Estate Planning and Administration 2016 6–9 Chapter 6—Using Mediation and Arbitration

excludes from enforcement charitable trusts and any disputes in which the department of health and human services would be an interested person.

1. Nevada - Sec. 60, SB 484 (2015)

Nevada enacted a new provision, effective Oct. 1, 2015, providing that arbitration provisions in wills and trusts are enforceable:

1. A provision in a will or trust instrument requiring the arbitration of disputes other than disputes of the validity of all or a part of a will or trust, between or among the beneficiaries and a fiduciary under the will or trust, or any combination of such persons or entities, is enforceable.

The new statute includes default provisions about procedures for the arbitration, and also makes clear that the will or trust instrument can address any of the following:

4. Such arbitration in a provision in a will or trust may include, without limitation: (a) The number, method of selection and minimum qualifications of arbitrators; (b) The selection and establishment of arbitration procedures, including, without limitation, the incorporation of the arbitration rules for wills and trusts adopted by the American Arbitration Association; (c) The county in which the dispute resolution will take place; (d) The scope of discovery; (e) The burden of proof; (f) Confidentiality of the arbitration process and the evidence produced during arbitration and discovery; (g) The awarding of attorney’s fees, expert fees and costs; (h) The time period in which the arbitration must be conducted and deciding an award; (i) The method of allocating the appointed person’s fees and expenses among the parties; (j) The required appointment of guardians ad litem; (k) The consequences to a party who fails to act in accordance with such provisions or contests such provisions; and (l) Other matters which are not inconsistent with NRS 38.206 to 38.248, inclusive. Sec. 60, SB 484 (2015).

2. Missouri - MO. REV. STAT. § 456.2-205 (2014)

Missouri adopted its statute in 2014.

1. Subject to the exception in subsection 2 of this section, a provision in a trust instrument requiring the mediation or arbitration of disputes between or among the beneficiaries, a fiduciary, a person granted nonfiduciary powers under the trust instrument, or any combination of such persons is enforceable.

Advanced Estate Planning and Administration 2016 6–10 Chapter 6—Using Mediation and Arbitration

2. A provision in a trust instrument requiring the mediation or arbitration of disputes relating to the validity of a trust is not enforceable unless all interested persons with regard to the dispute consent to the mediation or arbitration of the dispute.

3. Arizona – ARIZ. REV. STAT. ANN. § 14-10205 (2015)

Arizona adopted its statute in 2008.

A trust instrument may provide mandatory, exclusive and reasonable procedures to resolve issues between the trustee and interested persons or among interested persons with regard to the administration or distribution of the trust.

4. Florida - FLA. STAT. § 731.401 (2015)

Florida adopted its statute in 2007, and amended it in 2013.

(1) A provision in a will or trust requiring the arbitration of disputes, other than disputes of the validity of all or a part of a will or trust, between or among the beneficiaries and a fiduciary under the will or trust, or any combination of such persons or entities, is enforceable.

5. New Hampshire - R.S.A. § 564-B: 1-111A (2014)

New Hampshire adopted its statute in 2014. Its statute refers to “reasonable nonjudicial procedures” and allows an “interested person” to ask the court to determine whether the nonjudicial procedures are reasonable. Provisions in a trust will not be enforced with respect to a determination of the validity of the trust or related to a material purpose of the trust.

(a) If the terms of the trust require the interested persons to resolve a trust dispute exclusively by reasonable nonjudicial procedures, then those interested persons shall resolve that trust dispute in accordance with the terms of the trust. (b) An interested person may commence a judicial proceeding to determine whether the nonjudicial procedures are reasonable. To the extent that the terms of the trust purport to prohibit an interested person from commencing a judicial proceeding under this subsection or penalize an interested person for commencing a judicial proceeding under this subsection, those terms of the trust are void. (c) For purposes of this section, “interested person” means any person who would be an interested person in a judicial proceeding to resolve the trust dispute. (d) For purposes of this section, “trust dispute” means any matter in which a court has subject-matter jurisdiction under RSA 564-B:2-203

Advanced Estate Planning and Administration 2016 6–11 Chapter 6—Using Mediation and Arbitration

excluding (1) a determination of the validity of the trust or (2) a determination of any material purpose of the trust, including a determination of whether any modification, termination, or other action is consistent with a material purpose of the trust. (e) Unless the director of charitable trust expressly consents to the nonjudicial procedures, those procedures shall not apply to any matter involving a charitable trust. Unless the department of health and human services expressly consents to the nonjudicial procedures, those procedures shall not apply any matter in which that department would be an interested person.

C. Other Statutes Related to Probate or Trust Disputes

In 1999, Washington adopted the Trust and Estate Dispute Resolution Act (TEDRA). This statute provides a process for parties in a trust or estate dispute who wish to use mediation of a dispute, followed by arbitration if the mediation does not result in settlement. Wash. Rev. Code §§ 11.96A.260-11.96A.320 (2014).

A few other states, including Alaska, Hawaii, Massachusetts, Michigan, and New Jersey, have mediation and arbitration statutes that govern probate disputes. Alaska Ct. R. 4.5 (2006); Haw. Prob. R. 2.1 (2007); Mass. Prob. & Fam. Ct., Standing Order 1-04 (2006); Mich. Ct. R. 5.143 (2006); N.J. Ct. R. 1:40-6 (2007).

D. Other Benefits of Including Clauses in Documents

1. Moral Suasion

Those in favor of including mediation and arbitration clauses suggest that the power may lie in family desires to carry out the testator’s (or settlor’s) wishes.14 If family members know that the testator wanted them to try mediation first, before resorting to litigation, they may do so, just because “Granddad wanted it that way.” The clause may have the effect of encouraging the family to try mediation, even if a court would not require the parties to attempt mediation.

2. Early Mediation

Another advantage of including a mediation clause in a will is that the clause may remind the lawyer probating the estate to try to mediate any disputes that arise. A lawyer may be used to waiting for mediation until later in the litigation process, and using mediation early in the process has several advantages. Parties may be less polarized and more willing to listen to each other before their views have become entrenched during litigation. The parties may also avoid the costs of litigation if the issues can be resolved through early mediation.

14 See Fisher, supra note 9.

Advanced Estate Planning and Administration 2016 6–12 Chapter 6—Using Mediation and Arbitration

Sometimes an early mediation will not resolve the dispute but may allow the lawyers to establish some ground rules for the ensuing litigation. Parties may be able to agree to limited discovery or a timetable for the litigation that will save fees in the long run.

Some lawyers are concerned that early mediation will let the other side learn about their clients’ positions and interests in advance of litigation, and they worry that mediation may harm their clients’ own positions.

3. Family Settlement Doctrine

Pursuant to the family settlement doctrine, which has developed in connection with probate cases, courts are usually willing to accept a family settlement agreement absent proof of fraud, undue influence, or breach of a confidential relationship.15 The courts have encouraged family members to reach agreement, and the use of mediation to achieve agreement would seem a logical extension of this doctrine.

V. Sample Clauses and Drafting Suggestions

A. George Washington – Arbitration

George Washington’s will contained the following language:

[T]hat all disputes (if unhappily they should arise) shall be decided by three impartial and intelligent men, known for their probity and good understanding; two to be chose by the disputants each having the choice of one, and the third by those two — which three men thus chose shall, unfettered by law or legal constructions, declare their sense of the Testator's intention, and such decision is, to all intents and purposes, to be as binding on the parties as if it had been given in the Supreme Court of the United States.16

B. Issues to Consider

A mediation clause might address the variety of factors that will affect the mediation: (1) how will the mediator be chosen; (2) what style should the mediator use (facilitative or evaluative); ((3) what qualifications should the mediator have; and (4) who should participate in the mediation, and (5) the scope of the issues to be covered in the mediation.17 Although

15 See Andrew Stimmel, Mediating Will Disputes: A Proposal to Add a Discretionary Mediation Clause to the Uniform Probate Code, 18 OHIO ST. J. ON DISP. RES. 197, 219 (2002); Radford, supra note 4, at 645 (2000); see, e.g., In re Estate of Hodges, 725 S.W.2d 265 (Tex. App. 1986) (stating: “A family settlement agreement is an alternative method of administration in Texas that is a favorite of the law.”). 16 Quoted in Brian C. Hewitt, Probate Mediation: A Means to an End, 40 Res Gestae 41 (Aug. 1996). 17 Lela P. Love & Stewart E. Sterk, Leaving More than Money: Mediation Clauses in Estate Planning Documents, 65 WASH. & LEE L. REV. 539, 571-76 (2008).

Advanced Estate Planning and Administration 2016 6–13 Chapter 6—Using Mediation and Arbitration

these factors will all be important, the drafting lawyer may choose to leave the actual decisions about the mediation and the mediator to the participants and not try to include guidance in the document. Of course, the participants can always mediate the scope of the mediation or other of these factors, so any clause merely provides the testator’s recommendations. The potential benefit of including some of these factors in the mediation clause is that they flag factors that should be considered and may lead to more thoughtful choices in setting up the mediation.18

C. Precatory Clause

A mediation clause might simply ask any potential contestant to attempt mediation to resolve the dispute. The clause may not be binding, but the parties might try mediation, knowing it was the testator’s wish that they do so.

I request, but do not require, that persons asserting a claim to my estate agree to make a good faith effort to resolve any disputes about distribution of my estate through mediation, in accordance with the processes described below.19

D. Precatory Mediation Clause Coupled with Arbitration Clause

Daniel Bent of Hawaii, a litigator turned mediator, wrote in 2004 about Hawaii’s growing use of mediation in resolving probate and trust disputes in Hawaii.20 He included two samples of language to include in a trust. In the first sample clause, the settlor requests that any dispute be handled through mediation.

The Settlor has made the following statement that ____ (he/she) hereby incorporates into the Trust Instrument to have the same force and effect as any other language of the Trust Instrument:

As the Settlor, I expect that the Trustee and all beneficiaries will abide by the terms of the Trust which I have established. Indeed, I have intentionally given the Trustee wide permissible discretion. In the unlikely event that there should be any disagreement or dispute as to the meaning of the Trust's terms, the extent of the Trustee's duties (especially in light of the wide permissible discretion), the rights of any beneficiary, or any other matter whatsoever, I would be deeply disappointed if the estate that I have left for the benefit of my family and/or other beneficiaries would result in any negative impact on the relationships among them. Therefore, it is my fervent wish and directive that any such disagreement or dispute be resolved with the utmost civility, decency and consideration, and that all parties resolve it by mediation in good faith through the use of a neutral third-party. It would be to my profound and

18 Id. at 576. 19 Id. at 578. 20 Daniel Bent, My Bequest to My Heirs: Years of Contentious, Family Splitting Litigation . . . 8 HAWAII BAR J. 28 (Feb. 2004).

Advanced Estate Planning and Administration 2016 6–14 Chapter 6—Using Mediation and Arbitration

eternal sorrow that what I have provided in the interest of benefiting my loved ones would lead to any injury to their relationship.21

After providing the clause, Mr. Bent explains:

Trust instruments are written in the third person. The above is written as an insertion to allow it to be a first person and thus more personal statement by the Settlor. A “personal statement” allows the Settlor to express his or her desires and concerns on the matter in more personal terms directly to family members. Such a statement would help the mediator keep the parties at the table working through the tough issues where a possible settlement might otherwise break down.22

After discussing the use of mediation, Mr. Bent provides a second clause that can be added to the trust document to apply if mediation is unsuccessful.

Except when a trustee elects to petition the Court for instructions, if a dispute arises among any of the trustees and/or beneficiaries concerning the interpretation of or exercise of discretion under this instrument, and the dispute is not resolved by mediation, the dispute shall be submitted to and fully and finally resolved by arbitration in Honolulu, Hawaii by a Hawaii based neutral dispute resolution organization in accordance with that organization's rules, procedures and protocols for the arbitration of disputes, then in effect. Any decision of the arbitrator(s) shall be binding upon the parties. All expenses incurred by the trustees in such proceedings, including without limitation attorneys' fees and costs, will be an expense of administration of the trust, except with respect to a trustee who is determined by the arbitrator to have acted in bad faith.23

E. Combining a Mediation Clause with an In Terrorem Clause

An in terrorem clause (also called a “no contest clause”) provides that if a beneficiary contests a will or trust and loses the contest, the beneficiary will lose whatever bequest was provided under the will or trust. States vary in their enforcement of in terrorem clauses, but assuming that a will is probated in a state that will enforce the clause, a beneficiary has to weigh the benefit of the bequest with the potentially greater benefit of invalidating the will or establishing a construction of a provision that will be more beneficial to the contestant. One way to encourage a will contestant to engage in mediation or arbitration or before beginning litigation is to waive application of the in terrorem clause if the contestant first engages in one of these alternative forms of dispute resolution.

A provision mandating mediation or arbitration may not be enforced, and for that reason coupling a “demand” for mediation or arbitration with an in terrorem clause may be more successful in getting the parties to mediate or arbitrate. With a mediation clause, the

21 Id. at 29 (crediting Thomas Stirling with developing the clause). 22 Id. 23 Id. (crediting Rhonda Griswold with drafting an earlier version of the clause).

Advanced Estate Planning and Administration 2016 6–15 Chapter 6—Using Mediation and Arbitration

beneficiary loses nothing by engaging in mediation. The contestant may be able to get the desired resolution and can do so without risking his entire bequest by litigating. If the parties do not reach agreement in the mediation, the beneficiary has not lost his bequest by challenging the will. The beneficiary can decide whether to litigate, but may have learned enough in the course of the mediation to decide to accept the will as written.

An arbitration clause raises a different issue for the beneficiary to consider. With arbitration the beneficiary will have to accept the decision of the arbitrator, with no recourse to litigation if the beneficiary is not satisfied. But by using arbitration, the beneficiary can challenge the will without risk of losing his bequest under the in terrorem clause. If the result of the arbitration is not what the beneficiary wanted, the beneficiary will still be able to keep his bequest. In contrast, if the beneficiary litigates and loses, the beneficiary also loses his bequest. Thus, with either a mediation or an arbitration clause the beneficiary has a strong incentive to engage in mediation or arbitration rather than starting with litigation.24

Jonathan Blattmachr has drafted language for a clause requiring a contestant to participate in good faith mediation and if that does not successfully resolve the dispute arbitration, or lose the distribution otherwise provided by the document. The clause applies to challenges to the validity or construction of the trust and also covers disputes involving the trustees.

A. Actions Contesting the Agreement of Trust or Against Any Fiduciary Acting Hereunder. To the extent not prohibited by applicable law, if any individual (or anyone acting on behalf of such individual, such as a guardian, attorney-in-fact or other fiduciary) who is a beneficiary under this Agreement of Trust wishes to challenge the validity, construction or effect of all or any portion of this document (including but not limited to this Article), or wishes to commence an action against any fiduciary acting hereunder, such individual shall proceed as set forth in this paragraph A or shall forfeit his or her interest hereunder as specified in paragraph B hereof. Such individual is hereinafter referred to as the “challenging individual.” The challenging individual (or fiduciary acting on behalf of the challenging individual) shall agree in writing with the fiduciary acting under this instrument or named to act under it to participate in good faith mediation. Any fiduciary who refuses to so agree in writing shall cease to act as a fiduciary hereunder. Such good faith mediation shall be conducted in accordance with [specify]. All other persons whose interests hereunder reasonably could be affected by such action shall also agree to participate in such good faith mediation and/or to be bound by any agreement arising from such mediation. If no binding resolution of the dispute is reached within the later of six months after the commencement of the mediation or such later period for which the parties to the mediation continue mediation, then the challenging individual (or fiduciary acting of his or her behalf) shall agree in writing with the fiduciary acting under this instrument to submit the matter to binding arbitration before the American

24 See Blattmachr, supra note 7, at 258-61, Fisher, supra note 9, at 44 (quoting Joel Pipes, a California lawyer who uses this sort of clause and explains, “This combination in effect says, ‘If you challenge these documents before first mediating, you lose your gift.’”).

Advanced Estate Planning and Administration 2016 6–16 Chapter 6—Using Mediation and Arbitration

Arbitration Association in the location of the court which has primary jurisdiction over this instrument and shall participate in such arbitration. Any fiduciary who refuses to so agree in writing shall cease to act as a fiduciary hereunder. All other persons whose interests reasonably could be affected by such action shall also agree to participate in such arbitration and to be bound by such arbitration.

B. Forfeiture for Failure to Participate in Mediation or Arbitration or for Making a Frivolous or Bad Faith Claim. If the challenging individual (or fiduciary acting on behalf of the challenging individual) refuses to participate in the mediation or arbitration processes set forth in paragraph A above and commences an action in any court (whether or not it is determined that such court had jurisdiction over the matter in dispute) with respect to any matter relating to the validity, construction or effect of this instrument (including but not limited to this Article) or complaint against any fiduciary acting hereunder, or if the mediator determines based upon clear and convincing evidence that the challenging individual (or fiduciary acting on behalf of the challenging individual) did not participate in the mediation in good faith, or if the mediator or arbitrator determines by clear and convincing evidence that the challenging individual (or fiduciary acting on behalf of the challenging individual) made the challenge that was frivolous or in bad faith, the challenging individual (and all of his or her descendants) shall forfeit and cease to have any right or interest whatsoever under this Agreement of Trust. Any person whose interests reasonably could be affected by such action shall also agree to participate in such arbitration and to be bound by such arbitration or he or she shall forfeit all benefits hereunder.

C. Enforceability. If the foregoing provisions contained in this article are held by a court of competent jurisdiction to be invalid, ineffective or otherwise unenforceable, in whole or in part, such provisions shall be enforced to the extent not held to be invalid, ineffective or otherwise unenforceable, and it is intended that the Trustees with discretion to make distributions to beneficiaries hereunder not exercise such discretion in favor of any challenging individual or in favor of any of his or her descendants.25

If the clause requires a person to mediation “in good faith” in order to avoid forfeiture of a bequest, the mediator is likely the person who must determine whether each party has acted in good faith. If the mediator must certify that participants mediated in good faith, the mediator will be acting as a decision maker with respect to the duty to certify. The duty could affect the mediation process because participants might view the mediator differently, as less of a facilitator and more as someone who will try to force a settlement. Further, additional disputes could develop between family members over whether someone has acted “in good faith.”26

25 See Blattmachr, supra note 7, at 261-63. 26 See Love & Sterk, supra note 17, at 579-80.

Advanced Estate Planning and Administration 2016 6–17 Chapter 6—Using Mediation and Arbitration

F. Mediating in “Good Faith”

If a testator wants to try to impose a good faith requirement, simple guidelines will be helpful. The document could provide:

The parties must appear in person for and participate in the mediation session; the attorneys must comply with mediator requests for mediation briefs prior to the session; and the parties should present their perspective and listen to that of the other side.27

Due to the difficulty of certifying whether someone has participated in good faith, some mediation clauses simply require participation in mediation, with certification by the mediator that the participants could not reach agreement or that a specified period of time has passed without agreement.28

G. A Clause to Protect Future Documents - In Terrorem Clause to Encourage Mediation of a Future Document

A final strategy requires some thinking about the future, but may be effective to encourage mediation. If a will contest successfully invalidates a will, the contestant will take under a prior will, if one exists, or under intestacy. If a testator executes multiple wills over time, the line of wills can serve to protect the testator’s plan of disposition if the disgruntled heir takes only under intestacy. Sometimes, however, shares are adjusted among family members, and a beneficiary of one will might take more property under an earlier will. If so, with advance planning, a testator might include a provision that would invalidate any gift under the prior will if a beneficiary litigated rather than mediated the dispute that caused the invalidation of the subsequent will. The clause operates like an in terrorem clause applied to a prior document, so it applies even if the contest is successful. Of course, the testator (and her lawyer) have to be able to plan ahead.

In the event that the contesting beneficiary takes under this instrument as a result of his successful claim of invalidity of a future instrument, then this gift shall lapse unless this person first attempted or offered to mediate the dispute involving the future instrument which led to its invalidity.29

H. Incentives

1. Bequest Conditioned on Mediation

Mr. Blattmachr suggests a clause that operates as a condition precedent to receiving a distribution from a will or trust. The clause provides that if a named individual agrees to

27 See Love & Sterk, supra note 17, at 580. 28 See id. at 579-80. 29 See Fisher, supra note 9, at 44 (citing an interview with Lawrence Lebowsky).

Advanced Estate Planning and Administration 2016 6–18 Chapter 6—Using Mediation and Arbitration

resolve any dispute concerning the document or any complaint against a fiduciary through arbitration or mediation, the individual will receive a bequest under the will or trust.

Conditional Bequest to Son. If but only if (1) my son, Herman, both survives me and (2) he (or his guardian or other personal representative) executes, within two months of being advised by the person named hereunder as my Executor (who shall so advise him as soon after as my death as is reasonably possible) of the opportunity to do so, an acknowledged instrument in writing agreeing, in consideration of the bequest hereby offered to him, that any challenge he wishes to make or issue he wishes to raise relating to the validity, construction or effect of all or any portion of this document (including but not limited to this provision) or any complaint he may have at any time against any fiduciary acting hereunder shall be resolved, as hereafter provided, by mediation and arbitration as provided in paragraph B of this Article, and foregoes any opportunity to make such a challenge, raise such issue or make such complaint before any court or other governmental entity, I give and bequeath to him the sum of One Hundred Thousand Dollars ($100,000). If my son does not survive me or if he (or his guardian or other personal representative) shall fail to execute such an acknowledged instrument, this bequest shall lapse and no anti-lapse rule shall apply.

Terms of Mediation and Arbitration. The mediation that my son Herman must agree to in order to receive the conditional bequest for him provided in the foregoing paragraph of this instrument must be by the acknowledged instrument referred to in paragraph A of this Article in which he agrees to participate in good faith mediation conducted in accordance with [specify]. If no binding resolution of the matter that is the subject of the mediation reached within the later of six months after the commencement of the mediation or such later period for which the parties to the mediation continue mediation, then the arbitration that my son will be agreeing to by the execution of the acknowledged instrument referred to in paragraph A of this Article shall be binding arbitration before the American Arbitration Association in the location of the court which has primary jurisdiction over this instrument. Any fiduciary who refuses to participate in such mediation or arbitration shall cease to act as a fiduciary hereunder.30

2. Legal Fees

Another type of incentive is to provide that if a party agrees to mediate in good faith, the legal fees will be paid by the trust. If a party refuses to participate in mediation and then loses the case in litigation, the legal fees of all parties will be charged against the losing party’s share of the trust.31

30 See Blattmachr, supra note 7, at 264-65. 31 See Fisher, supra note 9, at 44 (citing an interview with Michael Whitty, an Illinois lawyer).

Advanced Estate Planning and Administration 2016 6–19 Chapter 6—Using Mediation and Arbitration

I. ACTEC Sample Clauses from the Report of the ACTEC Arbitration Task Force (2006)

The Report of the ACTEC Arbitration Task Force included three sample provisions, reproduced in the materials prepared by Mary Radford. Each of the clauses say that the parties can agree on the manner of resolution, and it they do not agree then they “shall” submit the matter to mediation, and if the matter is not resolved in mediation then to arbitration (Clauses 1 and 2) or to a simplified dispute resolution subject to the provisions of the ACTEC Model Simplified Trial Resolution Act (Clause 3).

VI. Use of Mediation in Issues Involving Elder Family Members

A growing use for mediation will be to resolve issues surrounding the care of elderly family members. As the baby boom generation ages and medical advances keep people alive longer, more people will face extended periods of limited capacity or decreasing physical ability. Families will need to make decisions about caring for elderly family members, and financial and emotional issues can lead to conflict. A decision about which child should care for Mother, whether Father should move to a care facility, or whether the family home should be sold so that Mother and Father can move to a retirement community may be hard for family members to discuss. As the elder parents decline, care issues may become more complicated and may change frequently. A mediator can help the children focus on what their parents want and help the children think creatively about ways to help their aging parents. The mediation process may also help the children develop communication skills that improve their ongoing problem solving in connection with their parents’ needs.

A skilled mediator may be able to help a family reach agreement on these difficult questions. The elderly person may still have capacity and be able to participate in the process, which will help the person accept the decisions made. The mediator will need to take special care to ensure adequate participation by the elderly person, perhaps by encouraging the use of an advocate for the person and by adjusting the location and conditions of the mediation to keep the elderly person comfortable. Children may live in other states, so arranging a mediation that will be convenient for everyone will be part of the challenge, but the organized family meeting will likely be more productive than telephone calls between individual family members.

The use of mediation when an elderly parent needs care may help a family maintain or repair relationships, develop a care plan for the elderly parent, and may even avoid the need for a guardianship or conservatorship, depending on the capacity of the parent and other family circumstances. Barbara Cashman Hahn has written an excellent article describing mediation in the elder law context. She provides insights into the usefulness of mediation in addressing legal and care concerns for elder family members, ethical issues of particular concern in elder mediation, issues involving the capacity of an elder participant, and the particular expertise needed for elder mediation.32

32 Barbara Cashman Hahn, 39 COLO. LAW. 45 (Mar. 2010).

Advanced Estate Planning and Administration 2016 6–20 Chapter 6—Using Mediation and Arbitration

Advanced Estate Planning and Administration 2016 6–21 Chapter 6—Using Mediation and Arbitration

Advanced Estate Planning and Administration 2016 6–22 Chapter 7 Estate Planning Ethics Questions

Philip Jones Duffy Kekel LLP Portland, Oregon

Robin Smith Butcher & Smith Law LLC Portland, Oregon

Margaret Vining Davis Wright Tremaine LLP Portland, Oregon

Katharine West Wyse Kadish LLP Portland, Oregon

Eric Wieland Samuels Yoelin Kantor LLP Portland, Oregon

Contents 1. Multiple Generations ...... 7–1 2. Married Couple Divorcing ...... 7–2 3. Ethical Duties to Deceased Client ...... 7–4 4. Joint Estate Planning 7–5 5. Fiduciaries and Beneficiaries ...... 7–7 6. Fiduciary as Beneficiary 7–7 7. Fiduciary Conflicts 7–9 8. Personal Representative’s Fees 7–12 9. Attorney for Charitable Beneficiary ...... 7–12 10. Personal Representative’s Attorney ...... 7–13 11. Joint Trust 7–13 12. Co-Trustees ...... 7–14 13. Estate Planning for Elderly Client ...... 7–18 Chapter 7—Estate Planning Ethics Questions

Advanced Estate Planning and Administration 2016 7–ii Chapter 7—Estate Planning Ethics Questions

The following questions and answers are not offered as legal advice. Many ethics situations do not have hard and fast answers, and the unique facts of each situation may vary and may affect the validity of the answers shown below. Please use the citations referenced below as a starting place to do your own research applicable to your individual situation. For guidance in your individual situation, either retain an attorney who specializes in legal ethics or call the Oregon State Bar and talk to one of their staff attorneys who offer free ethics advice.

1. Multiple Generations Can an attorney do estate planning for two generations of a family where both generations are the owners of the same closely-held family business and where attorney also represents the family owned business?

Yes, with consents. ORPC 1.7(b).

ORPC 1.7, the current client conflict rule, allows an attorney to provide estate planning services to two generations of a family even if the family members all own parts of the same family business if (i) the lawyer believes s/he can competently represent all parties, (ii) the representation is not prohibited by law, (iii) the lawyer is not required to represent one client on a matter for which s/he must oppose for another and (iv) each client gives written, informed consent.

Attorney should make sure all potential senior and junior generation clients understand who Attorney represents, which ought to be explained in detail in the engagement letter. There ought to be a new engagement letter for each new matter. In particular, Attorney ought to make sure all parties understand that Attorney cannot keep secrets from any other client. For example, if the family business is a horse slaughtering company, and junior generation son is secretly a vegetarian animal rights activist who hates the family business and wants to quit the business, son has to understand that being a joint client means that any secrets he tells Attorney cannot be kept secret from senior generation client.

Attorney needs to understand that the risk of representing a family is that each client will assume that Attorney is assuming a bigger role than what Attorney intended for each client. Therefore, Attorney needs to create a new engagement for each new family member client and make sure that each client, old and new, understands the possible conflicts before agreeing to being represented by one family lawyer

Senior generation couple engages Attorney to prepare irrevocable trusts for the benefit of junior generation. At the time, senior generation couple is Attorney’s only family client. Years later, after several beneficiaries of the trust have become estate planning clients of Attorney, and after considering for many years junior generation complaints about the successor trustee provisions, senior generation asks Attorney to amend the trustee succession provisions to replace a successor trustee with one more palatable to junior

Advanced Estate Planning and Administration 2016 7–1 Chapter 7—Estate Planning Ethics Questions

generation. The modification will be done by a nonjudicial settlement agreement signed by both senior and junior generations. Does Attorney need to get waivers/consents from any of the clients before proceeding?

There is a technical conflict here between the interests of senior and junior generations. However, if everyone agrees on the proposed change to trustee succession, Attorney can proceed, with conflict waivers from all clients who would sign the nonjudicial settlement agreement.

Attorney ought to be clear that s/he is representing senior generation, and, of course, recommend that the other clients consult with separate counsel before signing.

Senior generation couple wishes to amend irrevocable trusts that were created by senior generation couple in order to provide some protection to junior generation trustees who will also manage the family business so that the business can be managed effectively. This change might adversely affect other junior generation clients by changing the applicable fiduciary standard from the fiduciary standard to the business judgment rule standard. Junior generation has to sign off on this modification. Is this a waivable conflict?

Attorney can move forward with this project but only with signed waivers from all clients. The waiver should include a description of the project and its benefits, i.e., that all the clients benefit from having the family business run with the business judgment rule from an economic viewpoint. In addition, the waiver should explain that by signing the agreement, a client would be giving up the fiduciary standard from which the client could hold a trustee accountable, and that the client who does not understand what this means as a practical matter or is unsure as to what he or she wants to do, should consult with another independent lawyer to get advice regarding the advisability of giving up the fiduciary standard.

2. Married Couple Divorcing

Attorney has represented Husband and Wife in their estate planning for many years.

a. Wife calls and asks Attorney to refer her to a divorce attorney. May the attorney do so?

Yes. The attorney may refer Wife to a divorce attorney. Giving referrals is not legal advice.

b. Is Attorney required to tell Husband that Wife asked for a referral to a divorce attorney?

Advanced Estate Planning and Administration 2016 7–2 Chapter 7—Estate Planning Ethics Questions

c. Can the attorney continue to do estate planning for the couple without telling Husband that Wife asked for a referral to a divorce attorney?

If Husband and Wife are not current clients of Attorney, then Attorney is not required to tell Husband about the referral request, even if a prior engagement letter provided that Attorney will not keep secrets from either spouse.

If Attorney is currently engaged in estate planning projects for Husband and Wife, the question of whether the attorney must inform Husband depends in part on the terms of the engagement letter. Typically, engagement letters prohibit the attorney from keeping secrets and explain that any information shared with one client will be shared with the other, but some may permit the attorney to keep secrets. If the engagement letter prohibits secrets and requires the attorney to disclose all information to the other, then the attorney is required to tell Husband. In the absence of such an engagement letter, Attorney is not required to tell Husband about Wife’s request because (i) s/he is not required to disclose secrets by the engagement letter and (ii) the attorney is not required to disclose this information under the ethical rules.

In either case, attorney should terminate the estate planning services since estate planning and divorce may be related matters which could give rise to a conflict of interest between Husband and Wife.

ORCP 1.6 requires consent to reveal information relating to representation of a client. However, 1.6 does not appear to be applicable here because this information is not related to the representation of client.

d. After the couple gets divorced, may the attorney continue to represent both of them with respect to their separate estate planning? If so, what kind of consent letter is required? May the attorney continue to represent only one of them with respect to their estate planning? If so, what kind of consent letter is required?

Whether consent is required requires an analysis of whether a current client conflict exists (Oregon RPC 1.7) or former client conflict exists (Oregon RPC 1.9(a)). See also Oregon Formal Ethics Op No. 2005-148.

After the divorce, Attorney can continue to represent one or both of them if they have divided their assets, and consent is not required in order to do so, but consent is a good idea.

However, if the ex-spouses still have jointly owned assets, or ongoing obligations to each other under the settlement agreement, then Attorney should get conflict waivers before representing either ex-spouse.

Advanced Estate Planning and Administration 2016 7–3 Chapter 7—Estate Planning Ethics Questions

For example, if the proposed estate planning work for one of the ex-spouses includes attempting to gain control of an entity formed by Attorney during the joint estate planning representation, then there would be a matter specific former client conflict and written informed consents from each former spouse would be required before Attorney can represent one or both spouses. See OSB Formal Ethics Op. No. 2005-148 (answering question of whether attorney can represent one spouse in marital dissolution after representing both spouses in estate planning)

3. Ethical Duties to Deceased Client

Recently (OSB Bulletin, April 2014), an Oregon lawyer was disciplined for assisting the surviving spouse after the first spouse passed. The Attorney previously represented both spouses and assisted them in their estate planning, which included the creation of an irrevocable trust on the first death. After the first death, the lawyer helped the widow to remove assets from the husband’s irrevocable trust, in violation of the terms of the trust. The Bar held that the attorney violated his ethical duty to his former client, the deceased husband.

a. Is that correct? Do we have ethical duties to deceased clients?

Quite simply, yes. But when those duties become violated is quite grey.

b. What if the surviving spouse had not violated expressed terms of trust, but instead she and the attorney found a loophole in the husband’s trust and were able to remove assets without violating the terms of the trust? Is that ethical for the attorney to do? Even if the attorney knew that the deceased husband would not have been pleased?

It depends and is really fact specific. Did attorney have discussions with husband and wife during planning about how the plan could be modified and changed in the future? Is this “loophole” contrary to deceased client’s wishes/expectations? What if attorney told deceased client that his/her wishes/expectations were not enforceable unless they are placed in the controlling document?

c. What if the attorney helped the spouse violate terms of the Trust but such “violation” was permissible under applicable law? What if Trustee and beneficiaries signed off? What if a court signed off? Can an attorney represent the spouse in this scenario?

If the action is violating a duty owed to the prior client, the attorney cannot represent anyone else who is asking the attorney to violate said duty. An attorney cannot represent both sides. If the proposed action is contrary to

Advanced Estate Planning and Administration 2016 7–4 Chapter 7—Estate Planning Ethics Questions

deceased client’s instruction, the attorney should evaluate if the continued representation of the surviving spouse is appropriate under the circumstances. The attorney should look to their engagement letter and any correspondence to the deceased client to help determine whether or not he or she should continue the representation.

d. What if instead of death, the couple divorced? Can the attorney help the ex- spouses change their plans?

Generally, but obtaining proper waivers is highly recommended. Keep in mind, some divorce decrees require the parties to maintain life insurance, fund trusts, or make other dispositive arrangements. If you find out one client is in violation of the agreement or wants you to prepare a document that is contrary to the agreement, the attorney may have problems.

e. What can the attorney do while both clients are still alive to avoid potential future hot water?

Document your discussions; Document the client’s directions and expectations; Document agreements and understandings; Set appropriate expectations and disclosures in your engagement letters and correspondence.

Summary. The attorney may not violate his duty to his former client by violating the trust. ORPC 1.9. It depends on other factors as to whether or not the attorney can proceed if the action is not prohibited by the trust but attorney knows it would be contrary to what his client would have wanted. ORPC 1.9. Whether or not the Attorney may proceed depends on the engagement and disclosures made at time of representation of both parties. If both clients were properly informed of future possibilities and waived objections, then it is probably ok. If they were not properly informed, attorney be warned. This can qualify as a substantially related matter under ORPC 1.9(d). The wife’s interests are now materially adverse to her husband’s because she’s trying to remove the assets from an irrevocable trust. Even if legally allowed, under current law or otherwise, it’s still materially adverse to the husband. And as in In re. Hostetter, 348 Or 574, 238 P3d 13 (2010) the interests of a former client “can and often do survive” the client’s death.

4. Joint Estate Planning

An attorney prepares a joint revocable trust for a married couple. The couple has no children of their own, but wife has a daughter from a first marriage. The trust provides for all assets to pass to the surviving spouse at the first death. At the second death, half of the assets will pass to wife’s daughter, and the other half to husband’s friends, family, and charities selected by husband.

Advanced Estate Planning and Administration 2016 7–5 Chapter 7—Estate Planning Ethics Questions

The attorney advises the couple of the option of directing the share of the first spouse to die to an irrevocable trust. The couple opts instead for the decedent’s share to pass outright to the surviving spouse at the first death, as each of them trusts the other to “do the right thing.”

Wife dies. Wife’s daughter behaves abusively toward husband. Husband approaches the couple’s attorney, asking that the joint trust be amended to significantly reduce daughter’s share.

a. Can the attorney do so? What if it was not a joint Trust but separate trusts or separate Wills?

It depends. If the attorney adequately disclosed to both clients that without an irrevocable trust, whether through trust or Will, that the survivor could change the dispositive provisions, then the attorney is probably ok. However, if after the clients said, “I am sure you will do the right thing,” there could be problems.

b. Is there an argument that the couple made a contract with each other?

If there is a contract, the attorney cannot assist in the change of estate plan. Hopefully the attorney had a good discussion with the clients and explained that by leaving it to the surviving spouse, the surviving spouse can change the document, then that should alleviate the concern.

Summary. Be sure to determine how RPC 1.9(a) may apply. If the clients were informed that a change could possibly be made, then the attorney should be permitted to continue the representation. If the clients understand and knowingly agree to take risk/waive objection, then a lawyer most likely will be able to continue. A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless each affected client gives informed consent, confirmed in writing.

In Hostetter, 348 Or 574, 238 P3d 13 (2010), the Supreme Court clarified:

The wording of those rules focuses on the interests of the former client. . . . [A] client’s interests can and often do survive a client’s death, [and] the rules’ protections extend to a former client even after his or her death. But it is not just any interests of the former client that must survive. In the context of the disciplinary rule, it is the former client’s interests that pertain to the matter in which the lawyer previously represented the former client. It is

Advanced Estate Planning and Administration 2016 7–6 Chapter 7—Estate Planning Ethics Questions

those interests that must survive the former client’s death. 348 Or at 584 (emphasis in original).

5. Fiduciaries and Beneficiaries

May an attorney represent the personal representative of an estate and also represent a different person who is a beneficiary of the estate? Isn’t the attorney for the personal representative also the attorney for the beneficiaries?

An attorney for a personal representative does not represent the estate or any of the beneficiaries. Oregon Formal Opinion 2005-62; Oregon Formal Opinion 1991-119. The attorney represents the personal representative; see the following question. In most situations, the attorney cannot also represent any of the beneficiaries, due to the inherent conflict. It may be possible to represent a beneficiary on unrelated matters, such as the beneficiary’s personal estate planning, if consents are obtained.

6. Fiduciary as Beneficiary

Is it ever possible for an attorney to have a conflict of interest when the attorney represents a trustee who is also a beneficiary of the trust? Is that situation similar to having two clients? What if the trustee is not only a beneficiary, but also a claimant against the trust? Since the trustee has three roles to play, is that situation similar to having three clients?

No, the attorney cannot have a conflict if he represents one client who has two roles; the attorney has only one client. See Oregon Formal Opinions 1991-119 and 2005-119. If the client has three roles, the answer is the same. In each case, the duty of the attorney is to advise the one client how to balance the one client’s various interests. The client has conflicting interests, but the attorney does not have conflicting clients.

[Note that in 2005 and 2006, the OSB Ethics Committee re-wrote and re-published many of the prior Formal Ethics opinions. As a result, Opinions 1991-119 and 2005-119 are essentially the same opinions, but the latter opinion has citations to the more recent version of the rules.]

The fact that the trustee is also one of the beneficiaries does not require that person to retain two attorneys, one to represent the person as the trustee, and one to represent the person as a beneficiary. That one person needs only one attorney, and the attorney will not have a conflict of interest simply because the one client has a conflict of interest, or plays two conflicting roles. In Formal Opinion No. 2005-119, the Oregon State Bar ruled:

Advanced Estate Planning and Administration 2016 7–7 Chapter 7—Estate Planning Ethics Questions

It follows that when Lawyer A represents Widow as an individual and Widow in her capacity as personal representative, Lawyer A has only one client. Alternatively stated, the fact that Widow may have multiple interests as an individual and as a fiduciary does not mean that Lawyer A has more than one client, even if Widow’s personal interests may conflict with her obligations as a fiduciary. Representing one person who acts in several different capacities is not the same as representing several different people. Consequently, the current- client conflict rules in Oregon RPC 1.7, do not apply to Lawyer A’s situation. (Citations omitted)

The same result is reached by Formal Opinion No. 1991-119.

See also Baker Manock & Jensen v. Salwasser, 175 Cal.App.4th 1414, 1424, 96 Cal.Rptr.3d 785 (2009), in which the court stated, “ … in the case before us, there is no divergence of the interests of George as executor and George as beneficiary. Accordingly, there is no conflict of interest in representing both the executor and the beneficiary.”

In contrast to fiduciaries, attorneys must studiously avoid conflicts of interest. In general, attorneys may not represent a fiduciary while simultaneously representing one or more beneficiaries (although, as noted above, an attorney may represent a fiduciary who is also a beneficiary, because in that situation the attorney is representing only one person). Whenever communicating with beneficiaries, the trustee’s attorney must avoid giving a beneficiary the impression that the trustee’s attorney also represents the beneficiaries; for that reason, it would be helpful to frequently remind the beneficiaries that the trustee’s attorney represents only the trustee, and not any of the beneficiaries.

When representing a person who is both trustee and a beneficiary, it may be necessary or advisable to keep two sets of time entries, one reflecting time spent representing the trustee and one reflecting time spent representing the same person as beneficiary. The purpose of the two sets of time entries would be to charge the trustee for its representation (which would then be reimbursed by the trust), and to personally charge the same person for his or her personal representation as a beneficiary (which would not be reimbursed). In most situations, however, two sets of time records will not be necessary, since all of the time of the attorney will have been spent advising the trustee on how to treat all of the beneficiaries equally and fairly, and none of the time will have been spent advising the person on his or her personal interests. And if those personal interests coincide with the clear wording of the trust document, then the trustee is not advancing the personal interests of the trustee as beneficiary, but instead is merely carrying out the terms of the trust, which the trustee is obligated to do.

Advanced Estate Planning and Administration 2016 7–8 Chapter 7—Estate Planning Ethics Questions

7. Fiduciary Conflicts

If an attorney is not allowed to have conflicts of interests, doesn’t the same rule apply to fiduciaries, such as personal representatives and trustees? Aren’t they prohibited from having conflicts of interest?

Fiduciaries are permitted to have conflicts of interest. A conflict of interest on the part of a trustee is not necessarily grounds for removal. For example, oftentimes the trustee is also one of several beneficiaries of the trust, as pointed out by the comments to ORS 130.655. The Third Restatement of Trusts, §37, Comment f(1), states:

Thus, the fact that the trustee named by the settlor is one of the beneficiaries of the trust, or would otherwise have conflicting interests, is not a sufficient ground for removing the trustee or refusing to confirm the appointment. This is so even though the trustee has broad discretion in matters of distribution and investment.

However, in some cases the conflict of interest is so fundamental that removal of the fiduciary is warranted. Wharff v. Rohrback, 152 Or. App. 68, 73-74, 952 P.2d 87 (1998). In the Wharff case, one of the duties of the personal representative was to consider suing herself for causing the wrongful death of the decedent. The court held that the personal representative should be removed because that conflict was sufficiently substantial to justify removal. In Vander Galien v. Vander Galien, 47 Or. App. 233 (1980), the mother of the decedent was appointed as personal representative after mistakenly representing to the court that the decedent did not have a spouse, who would have had preference for appointment under ORS 113.085. In addition, a conflict of interest was present, or was likely to be present. The court held that a combination of the conflict and the error in the appointment of a non-preferred person justified the removal of the personal representative. In Faulkner’s Estate, 156 Or. 23 (1937), Elder’s Estate, 160 Or. 111 (1938), and Bean v. Pettengill, 57 Or. 22 (1910), the personal representative was removed because a conflict was present between the personal representative and the estate, due to the personal representative’s misappropriation, concealment, or fraudulent transfer of estate assets. When those factors were not present, and the alleged conflict was less substantial, the Court of Appeals declined to remove the personal representative. Roley v. Sammons, 215 Or. App. 401 (2007). See also Schaad v. Lorenz, 69 Or. App. 16 (1984).

For a more detailed discussion of the grounds for removal of a trustee, and for a discussion of the case law in Oregon regarding trustee removal, see §15.3, Removal of Trustee, Administering Trusts in Oregon (2007 Revision), Oregon State Bar.

A trustee does not have a conflict of interest merely because a trustee must balance the conflicting interests of the various beneficiaries. The Third Restatement of Trusts, §90, Comment c, states:

Advanced Estate Planning and Administration 2016 7–9 Chapter 7—Estate Planning Ethics Questions

Unlike the financial and other personal interests of the trustee, the divergent economic interests of trust beneficiaries give rise to conflicts of types that cannot simply be prohibited or avoided in the investment decisions of typical trusts. These problems regularly present the trustee with problems of conflicting obligations to diverse beneficiaries. . . . The interests of a life-income beneficiary, for example, are almost always inherently in competition with those of the remainder beneficiaries, especially in light of the risks of inflation; and the different tax circumstances of the various beneficiaries frequently create competing investment preferences, among concurrent as well as successive beneficiaries. . . These conflicting fiduciary obligations result in a necessarily flexible and somewhat indefinite duty of impartiality. The duty therefore requires the trustee to balance the competing interests of differently situated beneficiaries in a fair and reasonable manner.

That “flexible and somewhat indefinite duty of impartiality” could possibly make the trustee’s job a difficult one. If one beneficiary of a discretionary trust has unique medical needs, may the trustee increase the distributions to that beneficiary while decreasing the distributions to the other beneficiaries? Probably. If one beneficiary is known to be a spendthrift or a drug abuser who is likely to waste assets, can the distributions to that beneficiary be reduced while the other beneficiaries receive more? Probably. If one beneficiary lives in a state with a personal income tax, while the other beneficiaries do not, may the trustee distribute more to the one beneficiary in order to compensate him for his tax obligation? Probably not; after all, the other beneficiaries might live in sales tax states, but the answer is not entirely clear.

Similarly, §79(1)(a) of the Third Restatement notes that trustees shall take into account the differing interests of the beneficiaries, noting that the trustee has a duty to administer the trust “impartially and with due regard for the diverse beneficial interests created by the terms of the trust.” (Emphasis added) That subsection of the Restatement was quoted favorably by the Oregon Supreme Court in Arken v. City of Portland, 351 Or. 113, 164, 263 P.2d 975, 1006 (2011). Thus if one beneficiary has received property from the trust to which the beneficiary was not entitled, that beneficiary can be required to repay the funds, or “his beneficial interest is subject to charge for the repayment thereof, unless he has so changed his position that it is inequitable to compel him to make repayment.” Arken v. City of Portland, 351 Or. 113, 164, 263 P.2d 975, 1006 (2011), quoting Restatement (Second) of Trusts §254 (1959). Such a charge is often referred to as an offset. In a probate estate, the personal representative has a statutory right to make such an offset. ORS 116.153. The UTC is silent on the subject, but the Arken case indicates that the right of offset is nevertheless available to a trustee. However, ORS 130.725(18) permits a trustee to lend money to a beneficiary, and may collect such loans by offsetting the loan amount from future distributions to the beneficiary. That subsection is not entirely clear as to the types of debt to which it might apply. Does it

Advanced Estate Planning and Administration 2016 7–10 Chapter 7—Estate Planning Ethics Questions

apply to debt that originated from a transaction other than a loan? Apparently not. Does it apply to promissory notes that were assigned to the trust after the notes were executed in favor of the grantor? It would seem that the trustee would stand in the shoes of the grantor, and it would be as if the trustee had made the loan, and so the right of offset would appear to be present.

The Restatement (Second) of Trusts, §255, agrees: “If the trustee makes an advance or a loan of trust money to a beneficiary, the beneficiary’s interest is subject to a charge for the repayment of the amount advanced or lent.” Comment (f) to that section states that a spendthrift clause does not change that result: “Although the interest of the beneficiary is not transferable by him or subject to the claims of creditors, his interest is subject to a charge for advances made to him out of the trust property unless the trustor has manifested a different intention.” Comment (b) to §251A agrees.

The application or enforcement of that offset does not create an impermissible conflict of interest for the trustee; the trustee has a fiduciary obligation to deal fairly with diverse beneficial interests, even if that action benefits the interests of one beneficiary and harms the interests of another:

[A] trustee’s obligations are not met simply by maximizing current allocations to beneficiaries – and certainly not to one group of beneficiaries. A trustee has a duty of impartiality and, with respect to the various beneficiaries of the trust,” must administer the trust ‘impartially and with due regard for the diverse beneficial interests created by the terms of the trust.” White v. Public Employees Retirement Board, 351 Or. 426, 438 268 P.3d 600 (2011), quoting Restatement (Third) of Trusts § 79(1)(a). (Emphasis added)

(Whenever a beneficiary owes money to a testator or a trustor, the duties of the personal representative or trustee will be much easier to carry out if the document gives clear instructions. When drafting wills and trusts, consider including a provision that gives the fiduciary clear instructions on how to handle such debt, whether the debt should be offset against the beneficiary’s share of the estate or trust, what effect should be given to an expired statute of limitations, what effect should be given to a bankruptcy filing by the debtor beneficiary, and what effect should be given to the fact that the beneficiary is not a direct beneficiary of the estate or trust, but instead is a beneficiary (or one of several beneficiaries) of a subsequent trust that will receive assets from the estate or trust. The inclusion of such a provision will make life much easier for the fiduciary.)

Advanced Estate Planning and Administration 2016 7–11 Chapter 7—Estate Planning Ethics Questions

8. Personal Representative’s Fees May an attorney accept a payment from a personal representative out of the personal representative’s own funds for services rendered as attorney for the personal representative, without prior court approval?

Payment of attorney fees with estate assets requires prior court approval. ORS 116.183. However, ORS 116.183 does not prohibit an attorney from being paid from a personal representative’s personal funds.

Some personal representatives agree to pay the attorney fees with nonprobate funds where, for example, the estate lacks liquidity. Those payments do not normally require prior court approval, and such fees may be accepted by the attorney. Oregon Formal Opinion 2005-63. However, the best practice is to inform the court in the final accounting that the attorney fees were paid with nonprobate funds. This technique should not be followed if the purpose is to avoid court scrutiny; it should be followed only when legitimate reasons are present. This technique should not be followed if the intention is to advance nonprobate funds to the attorney, and then later seek reimbursement from the estate. Nevertheless, that technique was approved in Oregon Formal Opinion 2005-63.

OSB Formal Opinion No. 2005-171 states that an attorney may request and receive payments from a Personal Representative’s own funds without prior court approval. This conclusion is based on “the plain language of [ORS 116.18]”, which “contemplates that the personal representative is entitled to reimbursement of expenses incurred in the settlement of the estate”. Therefore, an attorney does not engage in unethical conduct if he or she is paid out of the personal representative’s personal funds, because the Oregon statute requires only that a personal representative obtain court approval before reimbursing him- or herself for those legal expenses from estate assets.

9. Attorney for Charitable Beneficiary May an attorney, who represents a nonprofit charity (“Charity”), prepare a will for a client (“Donor”) that leaves a bequest to Charity?

Yes, qualified, according to Oregon Formal Op. No. 2005-116.

Oregon RPC 1.7 allows attorney to represent the Donor and draft his or her will with a gift to Charity while continuing to represent Charity on other matters, with the informed written consent of both Charity and Donor. The attorney may not represent both Donor and Charity on the charitable gift planning, however, because that would be a prohibited, unwaivable conflict of interest under Oregon RPC 1.7(a)(1) and 1.7(b)(3).

Oregon RPC 1.7(a)(1) does not apply to the specific work of drafting Donor’s estate plan which incorporates a gift to Charity if attorney is not also representing Charity. However, Oregon RPC 1.7(a)(2) probably applies to attorney’s drafting of Donor’s Will

Advanced Estate Planning and Administration 2016 7–12 Chapter 7—Estate Planning Ethics Questions

which includes Charity as a beneficiary, but this present conflict can be waived with informed written consents from Donor and Charity.

Oregon Formal Op. No. 2005-116 points out that if attorney must disclose Charity’s confidential information to Donor as part of his or her work on the charitable gift, attorney must get Charity’s informed written consent prior to disclosing. Oregon RPC 1.6 and ORS 9.460(3).

10. Personal Representative’s Attorney May an attorney draft a will that includes a direction that the personal representative must retain that same attorney to represent the personal representative after the death of the testator?

This is a very poor practice, and is most likely not binding on the personal representative. At most, a will may include a provision reflecting testator’s preference that the personal representative retain the drafting attorney, but such a provision should be included only at the insistence of the testator.

As an initial matter, the attorney might not be able to represent the personal representative because he or she and the personal representative have an unwaivable conflict of interest. Furthermore, even if there aren’t any conflicts at the inception of the engagement, many issues can arise during the administration of an estate that would create a conflict of interest between the drafting attorney and the personal representative of the estate, or between the personal representative and the deceased client, which may not be waivable. In that event, the personal representative would have to engage a new attorney.

11. Joint Trust

I represent the personal representative of a probate estate. The administration of the estate is experiencing some problems. May I make an appointment to talk to the probate judge at ex parte time and get the judge’s guidance on those issues? Is it unethical to discuss the case with the judge with no one else present? Isn’t that the definition of ex parte?

RPC 3.5(b) provides that “A lawyer shall not communicate ex parte on the merits of a cause with [the judge] during the proceeding unless authorized to do so by law or court order.”

“Ex parte communication” includes pleadings, motions, and other requests for action submitted to the court, many of which are expressly authorized by statute or practice to be submitted on an ex parte basis. While there does not appear to be any clear authority on the matter in Oregon, it may be reasonable to apply the same rationale to a face-to- face conversation with the judge. In other words, if the attorney wishes to approach the

Advanced Estate Planning and Administration 2016 7–13 Chapter 7—Estate Planning Ethics Questions

judge about a disputed matter, or one which would require notice to beneficiaries, creditors, or other interested parties, it is inappropriate to do so on an ex parte basis. If the proposed communication concerns a matter that could properly be submitted to the court without notice to other interested persons, there is no clear ethical bar to doing so. In that case, the first step might be to discuss the situation with the probate court staff, because oftentimes the staff will be aware of the court’s policies, and a meeting with the judge will not be necessary.

A communication is not considered to be ex parte if advance notice is given to interested persons, even if they do not appear. If in doubt, give the interested parties notice that you intend to appear before the judge, so that they can appear at that time. In rare cases, a statute or a local rule might permit you to appear ex parte. Even though RPC 3.5 prohibits ex parte contact with a judge “on the merits of a cause,” do not assume that you may discuss procedural matters with the judge, as such a discussion might give you an unfair advantage and thus is prohibited. See Stevens, Making it Clear, Oregon State Bar Bulletin, November 2005; Schenck, 320 Or. 94, 879 P.2d 863; RPC 3.5.

12. Co-Trustees

Husband and Wife have a joint revocable living trust, and both Husband and Wife are serving as co-trustees. One attorney has been representing the couple in connection with the preparation of the joint trust.

A) Can an attorney represent both of them as co-trustees?

Yes; conditionally. The analysis has two steps: 1) is there a current conflict of interest, and if so, 2) is it waivable?

RPC 1.7(a) provides as a general rule that “a lawyer shall not represent a client if the representation involves a current conflict of interest. A current conflict of interest exists if: “(1) the representation of one client will be directly adverse to another client;

(2) there is a significant risk that the representation of one of more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person. . . .” [or]

(3) the lawyer is related to another lawyer, as parent, child, sibling, spouse or domestic partner, in a matter adverse to the person whom the lawyer knows is represented by the other lawyer in the same matter.”

Advanced Estate Planning and Administration 2016 7–14 Chapter 7—Estate Planning Ethics Questions

If a current conflict of interest exists, “a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

(2) the representation is not prohibited by law;

(3) the representation does not obligate the lawyer to contend for something on behalf of one client that the lawyer has a duty to oppose on behalf of another client; and

(4) each affected client gives informed consent, confirmed in writing.

It is common and acceptable to jointly represent a husband and wife in connection with their estate planning, providing that the spouses share common goals (or are comfortable with each spouse’s unique goals) and agree on how the lawyer should carry them out. While there is always a risk that a dispute or disagreement will arise between them, but whether that risk is “significant” depends on the particular couple and the specific facts of their situation. Factors that may increase the risk of such a conflict include children from prior relationships, significant disparities in assets between the spouses, and high- conflict relationships.

It is good practice to alert the clients to the possibility of a conflict, and obtain a written conflict waiver; bearing in mind that the conflict waiver is effective only if the lawyer reasonably believes that the conflict will not preclude him or her from representing both parties competently and diligently.

The same approach applies when the estate planning is complete, and the attorney is now representing the couple as co-trustees of their trust. Obtaining a written conflict waiver is good practice in any such case, and required if a current conflict of interest exists.

B) What if one of the spouses becomes incapacitated; can the attorney represent the non-incapacitated spouse?

Yes, provided that there is no current conflict of interest as defined in RPC 1.7, or a former client conflict as provided in RPC 1.9 (see below). In the event that such a conflict arises, the attorney should withdraw from representing the well spouse. The attorney may continue to represent the incapacitated spouse if the well spouse gives informed consent (confirmed in writing) and the attorney reasonably believes the conflict will not interfere with his or her competent and diligent representation of the incapacitated spouse. If the conflict makes such representation impossible, or the well spouse does not consent, the attorney should withdraw entirely, and consider whether to take steps to ensure that an attorney will be appointed for the incapacitated spouse.

Advanced Estate Planning and Administration 2016 7–15 Chapter 7—Estate Planning Ethics Questions

RPC 1.14 (“When the lawyer reasonably believes that the client has diminished capacity, is at risk of substantial physical, financial or other harm unless action is taken and cannot adequately act in the client’s own interest, the lawyer may take reasonably necessary protective action. . . .”)

RPC 1.9 (former client conflicts) provides in part that:

“(a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless each affected client gives informed consent, confirmed in writing.”

And

“(d) For purposes of this rule, matters are ‘substantially related’ if (1) the lawyer’s representation of the current client will injure or damage the former client in connection with the same transaction or legal dispute in which the lawyer previously represented the former client; or (2) there is a substantial risk that confidential factual information as would normally have been obtained in the prior representation of the former client would materially advance the current client’s position in the subsequent matter.”

C) What if Wife tries to become guardian for her incapacitated Husband? Can the attorney represent Wife in the guardianship proceeding?

No. Unlike administration of a trust created by the incapacitated spouse, a guardianship proceeding is adversarial in nature, and requires the attorney to advocate for seriously restricting the incapacitated client’s rights and freedom. This places the attorney in a current or former client conflict of interest (depending on whether the incapacitated Husband still reasonably considers the attorney to be his lawyer). The client’s lack of capacity – a requirement for imposition of guardianship – makes it unlikely that he can give an informed consent to the representation.

D) If Husband becomes incapacitated, can the attorney represent his agent under a power of attorney, or his conservator, or his guardian?

Agent under power of attorney – yes; qualified. The client’s agent, like his successor trustee, is a fiduciary he chose to represent his interests in the event of incapacity. Provided that the agent follows the client’s wishes, the client does not object to the agent’s actions, and the specific facts of the situation do not present a conflict of interest, the representation is permissible.

One might argue that once a guardianship or conservatorship is in place, the same analysis could apply. However, a guardian or conservator has a degree of power over

Advanced Estate Planning and Administration 2016 7–16 Chapter 7—Estate Planning Ethics Questions

the protected person that a trustee or agent does not have. Because the guardian or conservator has the power to take certain actions over the protected person’s objection, there is by definition a significant risk of the fiduciary’s interests being materially adverse to those of the protected person. This creates a current or former client conflict of interest that is likely unwaivable due to the client’s diminished capacity.

E) Can client waive this conflict? Must the waiver have been signed in advance, before the client became incapacitated?

After incapacity, effective waiver is almost certainly not possible. Even if client had given consent to the conflict prior to incapacity, it is questionable how “informed” such consent is given that the specific circumstances giving rise to the conflict had not yet occurred and were likely neither known nor reasonably anticipated at the time consent was given. Moreover, client’s capacity to understand the situation and revoke consent is compromised, making it risky to continue to rely on prior consent.

F) What if Husband and Wife both resign as co-trustees of their joint revocable trust? Can their attorney represent their child, who will serve as successor trustee?

If husband and wife nominated child as successor trustee, child acts in accordance with parents’ wishes, and there are no facts indicating materially adverse interests, there is no current conflict of interest. If husband or wife objects to child’s appointment or to the child’s actions as trustee, or other factors exist indicating material adversity, a current conflict of interest arises. Informed consent is required, confirmed in writing.

G) What if Husband and Wife both die? Can their estate planning attorney represent the successor trustee and/or the personal representative of either or both of their estates?

In most cases, yes. The attorney is assisting the fiduciary in carrying out the clients’ estate plan, which in itself does not create a conflict of interest. If, however, the fiduciary seeks to alter the plan or otherwise acts in a way that is not consistent with the deceased clients’ wishes, a former client conflict of interest arises. See RPC 1.9 (prohibiting representation adverse to a former client in the “same or substantially related matter”). Former client conflicts are waivable (RPC 1.9), but since the former client is deceased, obtaining a waiver is not possible. The fact of the former client’s death does not authorize the attorney to represent a party who is acting adversely to the client’s wishes in connection with the matter. In re. Hostetter, 348 Or 574, 238 P3d 13 (2010).

Advanced Estate Planning and Administration 2016 7–17 Chapter 7—Estate Planning Ethics Questions

13. Estate Planning for Elderly Client

Son calls you. He sets up an appointment for Mom because he tells you that Mom asked Son to find a lawyer for Mom. Son brings Mom to the meeting, and then Mom tells you that Mom wants to leave a disproportionate percentage of her assets to Son. What ethical issues does this situation present?

You must be careful to identify who your client is. If you are preparing a will for Mom, it is virtually impossible to contend that she is not your client. If you have represented son, refer mom to another lawyer to avoid a conflict of interest.

You must be careful to attempt to determine whether Mom has been unduly influenced or lacks testamentary capacity. This situation appears to involve several of the factors indicating undue influence described in Reddaway’s Estate, 214 Or. 410, 421-427, 329 P.2d 886, 891-893 (Or. 1958). The Oregon Supreme Court has held that when the donee is in a confidential relationship with the donor, the existence of the following factors will give rise to an inference of undue influence:

(1) Participation by the donee in the procurement of the gift. Here son has taken steps in the procurement of the gift finding the attorney and bringing the mother to the meeting. (2) Lack of independent and disinterested advice to the donor. Here whether the attorney is truly independent comes into question because the son found the attorney and brought the mother to the meeting. This is particularly true if the attorney has represented the son in the past. (3) Secrecy and haste in the transfer or gift. (4) Change in the donor´s attitude toward others. Here the client is going to treat her children differently. However, if evidence outside the control of the donee exists to explain the changes in attitude, this factor will be diminished. Anderson v. Hagedorn, 171 Or. App. 425, 15 P.3d 582 (2000). (5) Change in the donor´s plan of disposing of property. For example an earlier will that treated the children equally. (6) An unjust and unnatural gift. For example, cutting out family members or including someone who is not a natural object of the client’s bounty. (7) The donor´s susceptibility to influence. For example, how old is the client, does she show signs declining physical and cognitive status? Is the client dependent on the son for care? Is there any indication of the use of fear, guilt, anger, love, greed or prejudice to control another?

Advanced Estate Planning and Administration 2016 7–18 Chapter 7—Estate Planning Ethics Questions

However, the court also stated that “undue influence gained by kindness and affection will not be regarded as ‘undue’ if no imposition or fraud be practiced, even though it induce the testator to make an unequal ***distribution of his property in favor of those who have contributed to his comfort, *** if such a disposition is voluntarily made.” Id. However, this is not the case if the kindness was designed to induce the gift.

If you think that the mother is the subject of undue influence, you should not prepare the documents. You should also consider the possibility that undue influence might be considered elder abuse. If so, you may have an obligation to report the elder abuse under the mandatory reporting requirements in ORS 124.050.

Also there is potential civil liability under ORS 124.100 et. seq., including treble damages and attorney fees. ORS 124.100(2). This potential liability exists under ORS 123.100(5) if a person permits another to engage in financial abuse if the person “knowingly acts or fails to act under circumstances in which a reasonable person should have known” of the abuse. Assuming you believe that the mother is not actually under undue influence, you need to question whether the will you are about to prepare will be valid. For more information on insuring that any resulting will is valid, see Jones and Cartwright, How to Minimize the Risk of a successful Will or Trust Contest, Oregon State Bar Estate Planning and Administration Section Newsletter, October 2011. The article is available at:

https://www.osbar.org/secured/newsletters/newsletter.asp?docref=814|2011|10.

You should also be aware that if you prepare the documents you may be opening yourself up to being sued for assisting another to commit elder financial abuse. See discussion of ORS 124.100(5) above.

There is little case law on this issue. However, see Jones and Cartwright, How to Minimize the Risk of a successful Will or Trust Contest, Oregon State Bar Estate Planning and Administration Section Newsletter, October 2011, for a good discussion of why under Reynolds v Shrock, 341 Or 338 (2006) an attorney might not be liable in such a situation.

Advanced Estate Planning and Administration 2016 7–19 Chapter 7—Estate Planning Ethics Questions

Advanced Estate Planning and Administration 2016 7–20