msba section of estate and trust

Deborah A. Cohn, Chair Mary Beth Beattie, Chair-Elect Newsletter Mary Alice Smolarek, Editor Eileen Day O’Brien, Secretary Anne W. Coventry, Editor

Winter 2012 Vol. 22 No. 1 Notes From The Chair

Deborah A. Cohn1 Paley, Rothman, Goldstein, Rosenberg, Eig and Cooper

o combat money laundering and fi nancing and other related threats to rules under which attorney-client con- terrorist fi nancing, the interna- the integrity of the international fi nan- fi dentiality generally takes precedence Ttional community has issued cial system."7 In 2010 FATF issued its over disclosure requirements. The U.K. various laws, regulations and guidance Guidance on the Risk-Based Approach has already adopted this aspect of the on international fi nancial fl ows. U.S. to Combating Money Laundering and FATF recommendations, and lawyers residents, for example, have had to Terrorist Financing (Recommenda- there are filing significant numbers report on material overseas fi nancial tions)8 to combat these threats. of SARs and complying with the no holdings2 under the Bank Secrecy Act3 tipping-off requirements. since 1970 and in recent years have These Regulations may create serious had to disclose significant personal confl icts for lawyers. They require a Although the U.S. has not yet enacted information when opening fi nancial ac- lawyer to fi le suspicious activities re- laws and regulations calling for SARs counts4 and to fi le additional reports on ports (SARs) with government agencies and imposing no tipping-off rules, material overseas fi nancial holdings.5 on potential or ongoing client activities these may not be far off. The U.S. that the lawyer suspects may involve continues to be viewed as a relatively Additional recent changes refl ect the money laundering or terrorist fi nancing easy country in which to launder funds, efforts of the international Financial and, at the same time, they call for a and Congress and the Administration Action Task Force (FATF)6, established ban on informing clients about these re- have proposed measures to address in 1989 to "set standards and promote ports (the “no tipping-off” rule). These this issue. effective implementation of legal, recommendations clearly confl ict with regulatory and operational measures for the ABA's Model Rules of Professional combating money laundering, terrorist Conduct and state professional ethics (continued on page 2)

IN THIS ISSUE Notes From The Chair ...... 1 Maryland Caselaw Developments ...... 4 2012 Advanced Estate Planning Institute ...... 7 Estate and Gift Tax Implications of Same-Sex Marriage Legislation ...... 19 Whose Money is it Anyway? ...... 21 Notes from the Chair. . . (continued from page 1)

In 2011, Senator Levin (D-MI) introduced two acts,9 each 2. Client Risk: The FATF Guidance identifi es several catego- of which would designate “persons engaged in the business ries of potentially high risk clients. These include, inter alia, of forming new corporations, limited liability companies, politically exposed persons (PEPs) in foreign countries (e.g., partnerships, trusts or other legal entities” as fi nancial insti- a former deputy Minister of the Interior in a country with a tutions subject to anti-money laundering regulations unless history of civil strife or missing persons); clients conducting the attorney or fi rm uses a paid formation agent to form the their relationship or requesting services in unconventional entity.10 The exception would not protect trust and estate law- circumstances (e.g., offering to pay a premium for secrecy or yers since they do not use formation agents in creating trusts. speed, or requesting that cash wire-transferred from a foreign Lawyers preparing trusts or forming other entities for their country be deposited in the fi rm’s escrow account rather than clients would be required to undertake the scrupulous due in a bank account); and the use of legal structures making it diligence that banks and other fi nancial institutions undertake diffi cult to identify the true benefi cial owner or controlling before opening new fi nancial accounts and t o interests (e.g., use of nominees or layers of entities and trusts), collect and report on massive amounts of particularly if these have no apparent legitimate legal, tax, information about their clients. business or economic purpose.

Similarly, in March 2012, the 3. Service Risk: The FATF Guidance identifi es Treasury Department’s Financial certain aspects of potential matters that may Crimes Enforcement Network increase risk, including: requesting that the (FinCEN) issued a Notice of attorney, rather than a financial institution, Proposed Rulemaking regard- handle the money; concealment of the source or ing Customer Due Diligence benefi cial ownership of funds; requesting Requirements for Financial that a particular lawyer lacking Institutions.11 The proposal relevant expertise handle the would require a law fi rm to disclose matter even after the lawyer the identity of its clients when the refers the potential client to fi rm creates fi nancial accounts on an attorney knowledgeable behalf of clients, including law fi rm in the field; and rapidly trust accounts that hold client funds transfering funds into or out in trust for the fi rm’s clients or that hold a client’s advance of real estate with no apparent legal, tax or business need payments of fees and expenses. These initiatives clearly for the speed. confl ict with client confi dentiality standards. The ABA considered the FATF Guidance as too vague to In October, 2008, before issuing its Recommendations, FATF assist lawyers in evaluating client and matter risks and, issued separate guidance for lawyer due diligence when hence, as inadequate to forestall laws and regulations that taking on and representing clients (FATF Guidance).12 This would create a confl ict between cooperating with efforts guidance is based on the recognition that some clients and to block money laundering and terrorism fi nancing and matters pose much greater risks of money laundering and ter- maintaining client confi dentiality obligations. Hence, in rorist fi nancing than others and the principle that a lawyer’s 2010, it built on the three categories of risk identifi ed by obligation should be to take prudent, proportional, risk-based the FATF Guidance and adopted Voluntary Good Practices steps to investigate the potential for money laundering or Guidance for Lawyers to Detect and Combat Money Laun- terrorist fi nancing. dering and Terrorist Financing (Good Practice Guidance).13 The ABA Guidance calls for lawyers and law fi rms to The FATF Guidance identifi es three risk categories and develop systems to minimize the risks. These systems calls for attorneys who identify potentially high risk clients might include expanding client intake procedures (e.g., to conduct enhanced due diligence and, if appropriate, to confl icts checks) to require an assessment of client and decline matters. matter risks before a new client can be accepted. Firms may want to appoint a partner to evaluate diffi cult situ- 1. Country Risk: The FATF Guidance suggests that higher ations and a compliance offi cer to engage in web-based risk countries include those subject to sanctions, embargoes research to obtain additional information about potential or similar measures; countries identifi ed by credible sources clients that appear to present high risks. They may also as having signifi cant levels of corruption or criminal activity; want to establish internal controls that ensure that new and countries known to support terrorist organizations. (continued on page 3)

2 Notes from the Chair. . . (continued from page 2) client matters are not opened without evidence that the to conduct signifi cant client due diligence? Are you being attorney has exercised due diligence in evaluating the asked to handle the money? Are you being asked to create risks posed by the client or matter. trusts or business entities that might obscure the true owner or benefi ciary? Does the transaction involve the purchase and How might a high risk situation present itself in your prac- sale of land (or tangibles such as cars or jewelry) that could tice? Here are two fact patterns that have clear indicia of be used to launder the cash? Are you being asked to main- potential risk: tain secrecy, serve as a nominee, or handle the transaction quickly? Are you being offered additional fees to maintain A potential client, Artemio Cruz, a Mexican national, contacts secrecy or work quickly? you. He wants you to prepare a trust for his children in the U.S with his wife, of Argentinian nationality, as trustee. He Each of us needs to be sensitized to the need for enhanced will fund it with part of an inheritance he just received from client intake procedures to reduce the risk that we are inadver- his grandfather's estate and will have the estate wire transfer tently participating in money laundering or terrorist fi nancing. $5,000,000 directly to your law fi rm's escrow account. He We also need to be aware of the evolving legal framework, asks that you prepare a legal memorandum on tax issues and both in FATF and in the U.S., impacting our relations with fi ling requirements involving a large gift by a foreign national our potential and existing clients and the potential pressures to a trust with U.S. benefi ciaries. He also requests referrals on client confi dentiality. to accountants and a banker. Endnotes: Another potential client, Abdul Hakim Khan, a Pakistani national with a green card, living in Chicago, says he made 1 The author thanks Duncan E. Osborne, President-Elect of substantial profi ts in hedge funds and commodities trading, the American College of Trust and Estate Counsel, of the and now wants to retire in the Washington area. He had fi rm Osborne, Helman, Knebel & Deleery, L.L.P., in Austin, lived in D.C. as a child while his father was employed at the Texas, for his generous support and guidance with respect to Embassy of Pakistan. He asks you, as his nominee, to set up the issues discussed in this column. an LLC or similar entity in Maryland. He wants you to help 2 Form TDF 90-22.1, Report of Foreign Bank and Financial him purchase contiguous smaller parcels of undeveloped land Accounts (FBAR reports). in rural Frederick County over time so that the purchases do 3 31 U.S.C. 5311 et seq. not infl ate land prices. He hopes to create an idyllic escape 4 USA Patriot Act (Uniting and Strengthening America by from the bustle of Chicago. He says he loved hiking the Ap- Providing Appropriate Tools Required to Intercept and palachian Trail as a child and thinks the farmland between Obstruct Terrorism Act of 2001), PL 107-56, 115 STAT 272 Frederick and the Appalachian Trail will remind him of his (2001) childhood vacations. He understands that the county, like 5 IRS Form 8938 under the Foreign Account Tax Compliance many rural areas, is conservative and, because he is clearly Act (FATCA), 26 U.S.C. 6038D. of foreign extraction, wants to maintain anonymity. He asks 6 FATF’s members are the G-7 nations (U.S., U.K. Germany, that you maintain utmost discretion in your purchases. He France, Italy, Japan and Canada), the European Commission will wire transfer into your escrow account additional cash and eight other countries. over time as you locate appropriate properties. He will pay 7 www.fatf-gafi .org/pages/aboutus/ you a 15% premium over your usual fees for prompt and 8 www.fatf-gafi .org/topics/fatfrecommendations/ discreet service each time he sends additional cash and you 9 The Stop Tax Haven Abuse Act (S.1346) and the Cut Un- establish a new LLC. justifi ed Tax Loopholes Act (S.2075). 10 Under the Bank Secrecy Act, as modifi ed by the USA What are the risk factors that might lead you to undertake PATRIOT Act, 31 U.S.C. §§ 5311-5332 (2001). additional due diligence? Does the client or someone 11 77 Fed. Reg. 13047 (March 5, 2012). involved in the transaction come from a country with a his- 12 For a detailed analysis of the FATF Lawyer Guidance, see tory of corruption, drug traffi cking, political upheaval or Kevin L. Shepherd, “Guardians at the Gate: The Gatekeeper terrorist fi nancing? Does your client or someone involved Initiative and the Risk-Based Approach for Transactional in the transaction come from a family with a member who Layers,” Real Property Trust and Estate Law Journal (Winter currently or previously held a high government position? 2009). Does the transaction involve substantial sums of cash be- 13 Voluntary Good Practices Guidance for Lawyers to Detect ing transferred by wire into your account rather than to a and Combat Money Laundering and Terrorist Financing, fi nancial institution that has the ability and legal obligation www.americanbar.org.

3 Maryland Caselaw Developments

By Charles S. Abell, Esq. and Elizabeth A. Kearns, Esq. Furey, Doolan & Abell, LLP

Spouse’s Elective Share The Court also affi rmed on the question of income, holding that Ms. Nassif is entitled to her pro rata share of income The Court of Appeals considered several issues relating to earned during administration. In doing so, the Court relied calculation of an electing spouse’s statutory share in Green primarily on pre-1969 caselaw. The pre-1969 statute pro- v. Nassif, 426 Md. 258, 44 A.3d 321 (Md. 2012). The case vided a right to income on an elective share, as does the involved the estate of Walter Green, whose estate was val- current § 3-203, which the legislature revised in 2003. The ued at more than $28 million at the time of his death in law in effect in 1993 did not explicitly provide for income. 1993. Helen Nassif, Mr. Green’s widow, made a timely Nonetheless, the Court reasoned that the 1969 changes to election to take her statutory share of one-third. the law were not intended to remove an electing spouse’s right to income, and it continued to rely on the older case- The estate assets comprised extensive real estate and busi- law. Judge Harrell dissented from the Court on this issue, ness holdings, and the personal representative took his time arguing that the 1969 revisions were substantive, and there- with administration – more than 13 years, in fact. During fore that the pre-1969 caselaw was inapplicable. that period, the estate’s holdings increased in value. In ad- dition, at the outset of administration, the estate potentially The Court reversed (at least in part) with respect to the was subject to extensive claims in excess of more than $13 valuation date. The Court agreed that legatees ordinarily million; in the end, however, the estate ended up paying may pay the elective share in cash based on values as of the only about $103,000. date of election. Where the Court of Special Appeals had declined to read a time limit into the statute, however, the When the personal representative fi nally prepared to make Court of Appeals did impose a requirement that the cash out distribution in 2006, he contended that (1) the net estate on be accomplished within a reasonable time, reasoning that which the statutory share was based should be reduced by the legislature did not intend to give legatees an extended the total value of claims fi led against the estate, even though wait-and-see period at the expense of the electing spouse. most of those claims actually were not paid, (2) Ms. Nassif The Court did not defi ne “reasonable time” (but 13 years was not entitled to a share of the income earned during the is too long). period of administration, and (3) he could pay the elective share in cash, pursuant to § 3-208(b), based on the value of Ambiguity and Will Construction assets at the time of election in 1993, not on the appreciated values at the time of distribution in 2006. The Court of Special Appeals considered the use of extrin- sic evidence for will construction in Click v. Click, 204 Md. The Court of Special Appeals held for Ms. Nassif on the App. 349, 40 A.3d 1105 (Md. Ct. Spec. App. 2012). The fi rst two issues. With respect to valuation date, however, case involved the will of Joanne Click, who died with one it held that the elective share must be valued as of the date surviving son, Steven Click, and one deceased son, Frank of distribution if paid in kind, but that if the legatees ex- Click. Steven had one son, Bret, and Frank left three sur- ercise their right to pay in cash, rather than in kind, they viving daughters, Rebecca, Elizabeth, and Teresa. Steven may value as of the date of election. The Court of Special died two and a half months after Joanne. Appeals refused to impose a time limit on the right to cash out the share. Joanne had drafted her own will, using a computer form. Article Third of the Will left Steven the “tangible articles The Court of Appeals affi rmed the Court of Special Appeals of a personal nature, or my interest in any such property not with respect to the effect of claims on the calculation. Rely- otherwise disposed of by this Will.” Article Fifth provided ing on pre-1969 Maryland law as well as “common sense specifi c gifts to Bret, Rebecca, Elizabeth, and Teresa, and and fair play,” the Court held that only claims that actually also to Joanne’s brother, Warren Walls, and then stated that are paid qualify as “enforceable claims” that reduce the “net “assets not directly disposed of in this Will shall be given estate” under § 3-203(a). Thus the Court agreed that only to the surviving members in order of succession.” The Will the $103,000 actually paid could be deducted from the net contained no specifi c residuary clause. estate for purposes of calculating the elective share. (continued on page 5)

4 Maryland Caselaw Developments. . . (continued from page 4)

Warren, as Joanne’s personal representative, fi led a petition liability prior to distribution of the estate. One benefi ciary asking the Circuit Court for construction of the will. War- signed, but the other two refused. The personal representa- ren raised two primary questions. First, did the phrase “my tive petitioned the Orphans’ Court for release, relying on interest in any such property not otherwise disposed of by § 9-111 of the Estates & Trusts Article, which specifi cally this Will” in Article Third refer to all personal property, or authorizes a personal representative to request a release. only to Joanne’s tangible personal property? Second, who are the “surviving members in order of succession” de- Pursuant to that petition, the Orphans’ Court ordered the scribed in Article Fifth? benefi ciaries to sign the release. They appealed, arguing fi rst that the personal representative was not entitled to in- The personal representative of Steven’s estate attempted to sist on a release, and second that the Orphans’ Court lacked introduce extrinsic evidence to show Joanne’s intent. The jurisdiction to order them to sign. The Court of Special Ap- Circuit Court ruled that these provisions were not ambigu- peals affi rmed the Orphans’ Court on both grounds. ous, however, because all terms in the Will had specifi c legal meanings. Therefore, it held that Article Third con- The Court of Appeals agreed. It rejected the argument that § veyed only Joanne’s tangible personal property, and that 9-111 permitted the personal representative to request only Article Fifth conveyed the residue of the estate to Joanne’s a receipt, and also rejected the argument that court approval surviving issue, per stirpes, all without recourse to extrinsic pursuant to § 9-112 precludes the personal representative evidence of Joanne’s intent. from also requesting a release under § 9-111.

The Court of Special Appeals reversed. It found that The Court noted that a release of liability is not absolute – it these two clauses contain latent ambiguities – language would not relieve the personal representative from liability that, while seemingly plain, is susceptible to two or more for fraud, material mistake, or substantial irregularity. meanings. With respect to “any such property” in Ar- ticle Third, the Court reasoned that the phrase could be The Ritter decision (and § 9-111, on which it is based) ap- read to refer only to tangible personal property, but that plies only to personal representatives acting under probate it also could be read to refer to any property not specifi - administration, and not to trustees of trusts. Fortunately, cally devised in the Will. With respect to the meaning of the Court of Appeals also considered the question of when a “surviving members in order of succession,” the Court trustee may request a release (just keep reading). noted at least four specifi c possible meanings (including the order of royal succession). The Court disagreed with Trustee’s Ability to Request a Release the Circuit Court’s reliance on caselaw to fi nd a default preference for per stirpital distribution. A few months after affi rming a personal representative’s right to require a release in Allen v. Ritter, the Court of Ap- The Court noted that extrinsic evidence is admissible to peals in Hastings v. PNC Bank, __ Md. __, __ A.2d __, 2012 resolve a latent ambiguity and remanded the case for fur- WL 4464890 (Md. Sept. 27, 2012) had the opportunity to ther proceedings. consider whether a trustee also may request that the benefi - ciaries execute a release. The Court also considered some Personal Representative’s Right to Release questions relating to the calculation of inheritance tax.

In Allen v. Ritter, 424 Md. 216, 35 A.3d 443 (2011), the The case involved a trust that was created under the will of Court of Appeals affi rmed a decision of the Court of Spe- Marion Brevard for the benefi t of Reba Brevard during her cial Appeals that a personal representative may require ben- life. When Reba died in 2007, the trust was distributable to efi ciaries to execute a release prior to distribution of estate four nieces and nephews. When PNC sent the benefi ciaries assets. its fi nal accounting, it also sent a broad “Waiver, Receipt, Release, and Indemnifi cation” (the “Release”). PNC told The case arose out of a contentious estate, in which the ini- the benefi ciaries that it would distribute upon execution of tial personal representatives had been removed and replaced the Release, as an alternative to seeking a judicial order ap- with an experienced estates and trusts practitioner. The proving its accounting and releasing it from claims. Among benefi ciaries continued to fi ght even after the new personal other protections, the Release relieved PNC of liability in representative came on board. Therefore, after the Orphans’ its corporate capacity as well as its fi duciary capacity and Court approved the Final Account, the personal representa- tive requested that the benefi ciaries sign a release of her (continued on page 6)

5 Maryland Caselaw Developments. . . (continued from page 5) required the benefi ciaries to indemnify PNC against claims consent to PNC’s self-interested actions. by other benefi ciaries and by third parties (in addition to releasing the benefi ciaries’ own claims). In addition to reviewing the Release, the Court also consid- ered the calculation of inheritance taxes. PNC had calculat- The benefi ciaries argued that PNC was improperly plac- ed these items using the fair market value of the trust assets ing its own interest ahead of the benefi ciaries (and there- as of the date of Reba’s death (i.e., the time at which posses- fore breaching its fi duciary duty) by requesting this release. sion vested in the remainder benefi ciaries). The benefi cia- They also argued that PNC had calculated the Maryland in- ries argued that PNC should have excluded income earned heritance tax improperly. The Circuit Court held for PNC on trust assets and accumulated during Reba’s lifetime, on on the calculation, and dismissed the benefi ciaries’ claims the grounds that Maryland law does not subject post-death with respect to the Release, on the grounds that PNC had income to inheritance tax. only requested execution of the Release, and the benefi cia- ries could agree or not agree to that request. The Court The Court ruled against the benefi ciaries (the decision was of Special Appeals affi rmed the Circuit Court, in an unre- unanimous on this issue). The Court held that while Mary- ported opinion. land law does not subject post-death income to inheritance tax with respect to probate interests, it has a different rule The Court of Appeals (by a 4-3 majority) held that PNC for subsequent interests such as this one. Had the trustee did not breach its fi duciary duty by requesting indemnity chosen to prepay the inheritance tax, it would have done and release that is broader than what it could have received so based on the value of assets as of Marion’s death (i.e., through a judicial accounting. The Court held that the Re- without post-death income). Because the trustees chose to lease was not impermissibly broad in its terms, reasoning defer payment of the inheritance tax, however, they were that the benefi ciaries could have refused to sign the Release obligated to calculate the tax based on the value of trust and sent PNC to seek a judicial discharge. It also noted that assets at the time they vested. That is what PNC had done, the language of the Release in practice is less broad than and the Court held that it was done properly. it might seem, as it cannot and does not protect PNC from fraud, material mistake, or irregularity. Thus, the Court Right to Trust Accounting held that the Release was not so one-sided as to represent a breach of PNC’s fi duciary duty. The Court further sug- In Johnson v. Johnson, 184 Md. App. 643, 967 A.2d 274 gested that even if the Release were so broad as to be a (Md. Ct. Spec. App. 2009), the Court of Appeals suggested self-interested act by the trustee, the benefi ciaries implicitly that remainder benefi ciaries (even contingent ones) have would be consenting to that act by signing the Release. broad rights to require trust accountings. The Court of Ap- peals granted certiorari, but did not decide the merits of the Judge Adkins dissented from the Court’s opinion, joined by case. Instead, the Court held that the underlying Circuit Chief Judge Bell and Judge Greene. The dissent focused on Court order for an accounting was not a fi nal judgment, and three aspects of the Release that the three judges found im- therefore could not be appealed. For this reason, in Johnson permissible – the protection of PNC in its corporate capaci- v. Johnson, 423 Md. 602, 32 A.3d 1072 (Md. 2011), the ty beyond its fi duciary capacity, the obligation to indemnify Court vacated the Court of Special Appeals decision. The for all costs, not just reasonable ones, and the obligation Court did not address the merits of that decision, however, to indemnify against claims of third parties. The dissent so it remains unclear whether Maryland law does require argued that PNC had not adequately informed the benefi cia- trustees to account to remainder benefi ciaries (though it ap- ries that the Release gave greater protections than a judicial pears at least that the benefi ciary in this particular case will approval would, and therefore that there could be no valid get an accounting).

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6 2012 Advanced Estate Planning Institute

By Danielle M. Cruttenden, Esq. and G. Thomas Collinson, Esq. Merrill, Cruttenden & Collinson, P.A.

On May 8, 2012 the Maryland State Bar Association pre- The law defi nes a statutory power of attorney as one that is sented the 2012 Advanced Estate Planning Institute. The “substantially in the same form” as one of the form powers theme of this year’s Advanced Estate Planning Institute printed in the statute. Concern arose about whether, and how was Life Insurance Issues in Estate Planning and it was much, the power of attorney form could be changed for fear presented in four parts. First up, however, was a legislative that it would no longer be considered substantially similar. report of the 2012 Maryland legislative session. A sum- After much consideration, and citing to the fact that the con- mary of each presentation follows. In some instances the cept of “substantial compliance” or “substantially similar” is summaries pull content directly from the written materials found throughout the Maryland Code, the Section Council of the speakers. determined that to defi ne “substantially in the same form” legislatively would likely pose more problems. Amendments Legislative Wins and Losses in the 2012 to the law require the inclusion of language in both statutory forms warning that the execution of the form (1) may alter Maryland General Assembly the benefi ts the principal receives, (2) may cause a taxable - Deborah A. Cohn, Esq. gift to occur and (3) may cause estate tax inclusion for the Law Firm of Paley Rothman agent. The new law also changes the forms to provide for the designation of two or more agents serving together. Co- Maryland Trust Act – (SB722/HB 682) – Withdrawn agents must act unanimously unless the principal provides otherwise in the special instructions provisions of the form. Presented for the second year, the Trust Act was withdrawn Finally, the new law clarifi es the distinction between the after receiving an unfavorable report by the House Judiciary appointment of a guardian of one’s person and a guardian Committee. The purpose of the Act is to codify Maryland of one’s property. The new law became effective October 1, trust law in order to provide specifi c guidance in areas 2012, but provides that any statutory power of attorney in the where current statutes and common law fail. The Section form that existed prior to that date and which was properly Council began working on a Maryland Trust Code in 2004. executed does not have to be changed. Its goal was to codify existing Maryland trust law, address needed areas and modernize where appropriate. The Section Increased Threshold Value for Small Estates (SB 353/HB Council, working with the Trust Committee of the Bankers 218) – Passed Association, fi rst presented legislation in the 2011 Session. The legislation was tabled to allow interest groups to resolve This new law, effective October 1, 2012, raises the thresh- their concerns with Section Council. The primary concern old of small estates from $50,000 to $100,000 where the was with the statute of limitations under various scenarios surviving spouse is the sole benefi ciary and from $30,000 of the proposed law. In 2012 hearings were again held. to $50,000 in all other cases. Small estates are not required Members of the House Judiciary Committee expressed the to fi le accountings, are not subject to personal representa- need to understand the use and liability of directed trustees. tive’s commissions and require the publication of only one It was hoped that a summer study would allow the House notice. The change in the law is intended to reduce the Judiciary Committee’s concerns about the statute of limi- time and expense of administering estates with minimal tations and directed trustees to be resolved. Even if they assets. The bond threshold remains in order to protect are, however, the Senate Judicial Proceedings Committee the interests of creditors and benefi ciaries. Creditors may may have concerns of their own. It appears there will be still fi le claims. more to report. Funeral Expenses (SB 397/HB773) – Passed Power of Attorney Act Amendments – (SB 711/HB 774) – Passed Estates and Trusts Section 8-106 allows the personal repre- sentative of a solvent estate to pay for the funeral expenses In 2010 the General and Limited Power of Attorney Act of a decedent without an order of court if the will specifi cally was enacted. One of the many features of the law is the li- empowers the personal representative to do so. Otherwise, ability of a party challenging a properly executed statutory form power of attorney to pay the other party’s legal fees. (continued on page 8)

7 Advanced Estate Planning Institute. . . (continued from page 7) a personal representative is limited to a funeral allowance of must charge its payment of the income tax attributable to the $10,000 in regular estates and $5,000 for small estates unless entity income between trust income and trust principal in the a special order from the court is obtained. The term “funeral same proportion as the receipts were allocated between trust expenses” was not defi ned in the Code. Effective October 1, income and trust principal. If total receipts from the entity 2012, the funeral allowance will be $10,000 for both small are inadequate to cover the trust’s income taxes on its share and regular estates. The amount may not be exceeded unless of entity income, then the trust must pay that additional tax the estate is both solvent and either (1) the personal represen- liability from principal. Finally, the new law provides that tative obtains a court order approving a higher amount or (2) where a trust receives a distribution deduction for fi duciary the will expressly empowers the personal representative to income distributed to a benefi ciary, the trustee is to increase pay the expenses without court order. The new law defi nes the income and principal receipts to the extent trust taxes are “funeral expenses” to include not only funeral, cremation reduced as a result of the distribution deduction. and burial expenses related to the disposition of the dece- dent’s remains, memorials and memorial services, but also Family Farm Preservation Act (SB 294/HB444) – Passed the expenses of food and beverages related to pre-funeral and post-funeral gatherings or meals and other reasonable This law provides for a $5,000,000 exemption from the expenses authorized in the decedent’s will. decedent’s gross estate of real and personal property used primarily for farming purposes if the property passes to a Principal and Income Act Amendments (SB 787/HB 772) qualifi ed recipient. It also reduces to 5% the tax rate on quali- – Passed fi ed agricultural property valued in excess of $5,000,000. A ten-year recapture provision is included if the property ceases The amendment to Section 15-516(d) of the Principal and to be used for farming purposes. Income Act requires certain allocations between principal and income of distributions from an IRA or qualifi ed plan Posthumous Use of Genetic Material (SB71/HB101) – account to a marital trust so as to satisfy the safe harbor Passed provisions set forth in IRS Rev. Rul. 2006-26. Specifi cally, the new law requires the trustee of a marital trust, upon This law changes the defi nition of “child” in Estates and request of the surviving spouse, to calculate separately Trusts Section 1-205 to include a child conceived from the the internal income of the IRA or QRP. If unable to do so genetic material of a person after the death of the person if because of lack of information provided by the retirement the person consented, in a writing signed on or after October plan’s administrator, the internal income of the IRA/QRP 1, 2012, to (1) the use of his or her genetic material for post- is deemed to be 4%. The new law also provides that upon humous conception in accordance with Health Care General demand by the surviving spouse, the trustee of a marital Section 20-111 and (2) to be the parent of the posthumously trust is required (1) to demand that the plan administrator conceived child. To be entitled to a distribution in his or her distribute the internal income of the IRA/QRP to the marital own right, the posthumously conceived child must be born trust and then (2) to distribute that internal income to the within two years after the death of the donor/parent. There spouse. Finally, the trustee of the marital trust, upon request are many concerns about this new law. Although it appears of the surviving spouse, is required to allocate marital trust that the legislature did not intend for it to apply retroactively, principal to marital trust income if the internal income of the the bill does not expressly state that it is limited to estates and IRA/QRP exceeds distributions from the IRA/QRP to the trusts created after October 1, 2012. Thus, the legislation trust. Without these changes to Section 15-516, unexpected could result in divesting the current interests of estate and estate taxes and penalties could have been assessed by the trust benefi ciaries. Personal Representatives and Trustees IRS on the grounds that marital trusts created by wills or may now be at risk for having distributed assets before the trusts silent on these issues do not qualify for the federal closing of the two-year window. The new law interferes estate tax marital deduction. with the ability of IRA and qualifi ed plan benefi ciaries to receive their required minimum distributions. A widespread Estates and Trusts Section 15-527 was amended to clarify the concern exists that the new law will cause a two-year delay rules for allocating trust income taxes attributable to entity in administration and fi nal distribution of trusts and estates. income between trust income and trust principal. A trust Attempts to amend the legislation failed; however, Delegate must pay the income taxes on the share of an entity’s taxable Pena-Melnyk, the primary sponsor of the bill, has agreed to income from trust income to the extent the receipts from the consider legislative amendments in 2013 aimed at providing entity are allocated only to income. If entity income is allo- technical corrections. cated between trust income and trust principal, then the trust (continued on page 9)

8 Advanced Estate Planning Institute. . . (continued from page 8)

Providing Orphans’ Court Jurisdiction over UTMA Accounts investigative resources available to them. After Creation of the Account (SB 396/HB 822) – Passed Deceased Personality’s Property Rights (HB 557) – Unfa- The defi nition of “court” is changed in Estates and Trusts vorable Report Section 13-301 to include Orphans’ Court so that concur- rent jurisdiction is given to both the Circuit Court and the The right of publicity is not recognized as a property right Orphans’ Court over UTMA matters, even when not in the in Maryland. Currently, an individual may sue for damages context of an ongoing probate proceeding. For example, if a for invasion of privacy, but that that right terminates upon successor custodian of an UTMA account is needed because death. This law would have established a property right – the original custodian can no longer serve and the document the right of publicity or use of personality. This right would creating the custodial account did not appoint a successor, be transferable at death and be enforceable by the person’s the Orphans’ Court will have jurisdiction to approve the ap- designated benefi ciaries and certain heirs. Over two-thirds pointment of a successor guardian. The Orphans’ Court will of states recognize a right of publicity under common law also be able to direct an accounting from a custodian. or by statute. Benefi ciaries of famous individuals in these states may pursue actions for future unauthorized use of a Baltimore County Orphans’ Court Constitutional Amendment famous person’s persona. More input is needed in order (HB4/SB81/SB48) SB 48 – Passed codify this property right. The Estates and Trust Law Section Council has offered to work with the sponsor of the originally Under the Maryland Constitution, Baltimore City Orphans’ proposed legislation to prepare a new bill that would be ac- Court judges must be attorneys. Both Baltimore County ceptable to the House Judiciary Committee. and Prince George’s County have a large volume of Or- phans’ Court matters. Estates and Trusts Section 2-106 Slayer’s Rule – (SB 517/ HB 735) – Died provides that in Baltimore City, Baltimore County and Prince George’s County, an Orphans’ Court judge who is Maryland is one of three states which does not have a statu- an attorney may act individually in all matters. In all other tory slayer’s rule. The slayer’s rule prohibits the slayer from jurisdictions (except Harford and Montgomery Counties inheriting from the victim. A critical component of any where the Circuit Court sits as the Orphans’ Court), two Slayer’s Rule is whether the descendants of the slayer are judges are required for any action. By requiring all Orphans’ also precluded from inheriting. Some states’ rules cover Court judges in Baltimore and Prince George’s Counties to only probate assets, while others include non-probate assets. be attorneys, this constitutional amendment aims to ensure There may also be distinctions between testate and intestate more effi cient utilization of Orphans’ Court judges. The estates. The Estates and Trust Law Section Council will proposed amendment to Maryland’s Constitution that all continue to assist the bill sponsors, Del. Kelly Shultz and Baltimore County and Prince George’s County Orphans’ Senator Christopher Shank, in proposed legislative refi ne- Court judges be members of the Maryland bar appeared on ments of the bill. the November 2012 ballot and was adopted. Elective Share and the Augmented Estate (SB 633) – Con- Jurisdiction of Orphans’ Court Judge in Guardianship of a sideration Deferred Minor (SB 416/ HB 823) – Died The case, Karsenty v. Shoukroun, 959 A.2d. 1147 (Md., 2008) Estates and Trusts Section 13-105 provides that an Orphans’ creates uncertainty about elective share rights under Maryland Court judge, who is a member of the bar, may exercise juris- law. Senator Frosh, Chair of the Senate Judicial Proceedings diction over guardianship of the person of a minor, regardless Committee, introduced legislation providing for an elective of whether the minor who is the subject of the petition for share over an augmented estate that takes into account non- guardianship of the person has or may inherit property or is probate assets. The legislation will be deferred for further destitute. The proposed legislation would have permitted all consideration until 2013. The Estates and Trust Law Section Orphans’ Court judges to hear uncontested cases involving Council agreed to work on this legislation if requested. guardianship of the person of a minor. Constitutional con- cerns are raised by the existing law which is seen as provid- Vehicle Laws: Title and Registration; Fees to Change Title ing unequal access to the courts and creating two classes of and Registration to Surviving Spouse (SB560) – Passed Sen- Orphans’ Court judges. Others argue that judges who are ate; No Action by House attorneys are better qualifi ed to hear guardianship of minor cases and that Circuit Court judges, in particular, have more (continued on page 10)

9 Advanced Estate Planning Institute. . . (continued from page 9)

Under current law, a jointly titled motor vehicle cannot This bill would have closed a loophole under Maryland law be driven by a surviving spouse until a new certifi cate of which excludes the income of an electing small business trust title is issued and the vehicle is re-registered. Under the from Maryland income tax. Due to a mismatch between the new law, until the registration in both names expires, the federal and Maryland income tax laws, this income is not surviving spouse would be permitted to drive the vehicle currently taken into account under Maryland law. based upon the pre-existing joint registration and would not be required to apply for a new certifi cate of title until Overview of Life Insurance Products: The the earlier certifi cate expired. Risks and Benefi ts of Each and How to Trial de Novo on Appeal from Orphans’ Court Judgment (HB Use in Estate Planning; Understanding 963) – Unfavorable Report by House Judiciary Committee; Life Insurance Illustration Bill Withdrawn by Sponsor - David Morris, Esq. Franklin Morris This bill would have required any appeal from a fi nal judg- ment by the Orphans’ Court to be made to a Circuit Court An insured’s goal in utilizing life insurance is to move the risk and to be heard on the Orphans’ Court record, rather than de of loss at his death from his estate or business to an insurance novo. It would have permitted lawyers in a case to initiate company. The original and familiar form of coverage, known the proceeding in the Circuit Court thus bypassing the Or- as term coverage, quantifi ed the risk of an insured’s death phans’ Court altogether or to transfer existing cases to Circuit based upon age, occupation, recreation, health and tobacco Court. The Orphans’ Court would continue to transfer cases use and priced the product to match the increasing risk of loss. or specifi c issues of fact to the Circuit Court. Sponsors of the Because the cost of term coverage becomes too great with bill believe that Circuit Courts are better equipped to develop the insured’s increasing age, other life insurance products appropriate records in complex cases. They also argue that if were developed. The level premium product was designed to litigants realize that the Orphans’ Court record will be deter- average the risk of death over an insured’s expected lifetime. minative on appeal, then they will develop their best case at This was accomplished by having the younger insured pay that level instead of treating it as a discovery venue leading more in the earlier years of the policy. Insurance companies to increased expense. This legislation with amendment is would deposit the excess in a reserve fund to cover future expected to be presented again in 2013. costs, but would discount the cost of the policy by the earn- ings on the reserve fund. Whole life policies with cash values Increase in Fees Charged by Registers of Wills (HB 1386) evolved. Due to infl ation experienced in the 1970s, many – Unfavorable Report companies changed the investments of the policy reserves from long-term bonds to short-term interest products. New This bill would have increased the probate fees, recording fees life insurance products were then developed to address the and copying charges that the Registers of Wills could charge. uncertainty of the long-term interest rates. Universal life insurance combines term insurance with investment vehicles. Special and Supplemental Needs Trusts – Regulation by State These policies create a non-fi xed, higher risk policy in which Agencies (HB 553) – Passed in House; Died in Senate the investment and mortality risks are shared between the insurer and the insured. During the bull market run of the This bill would have prohibited state agencies that provide 1980s, universal life policies were modifi ed to include an public benefi ts to disabled individuals from adopting regula- equity component as part of the policy’s investment fund. tions that are more restrictive than federal or state law. The With market values declining in recent years, the appeal of bill also would have required state regulations to permit traditional whole life policies has returned. pooled-asset special needs trust funds to retain any unused assets on a benefi ciary’s death, which is necessary to make There are two key questions to ask in selecting an appropriate the assets viable. Finally, the proposed bill precluded the life insurance policy. First, how long will the coverage be required disclosure of a benefi ciary’s personal information needed? Term coverage is generally best if the answer is a without his or her consent. The bill died in part due to a state period of less than 15 years. Universal polices are best if the agency’s retraction of proposed regulations which, if adopted, answer falls somewhere between 10 and 17 years, whereas would have been in violation of the proposed legislation. whole life policies are best if they will be in place for 15 or more years. Second, what is the insured’s current cash Electing Small Business Trusts – State Tax Loophole Elimi- nation (HB 128) – Died in House (continued on page 11)

10 Advanced Estate Planning Institute. . . (continued from page 10)

fl ow? Sometimes budget concerns require the purchase of cash, accumulations in a “savings account” (interest is tax- term insurance in order to obtain the appropriate amount of able) and paid-up additional insurance. Direct recognition coverage. As the insured’s cash fl ow improves, longer term of dividends should never be selected if the client plans to products can be added. access the cash value of the policy. Dividends on policies with loans are lower than policies without loans. When assisting clients with their options for life insurance policies, it is necessary for the adviser to become familiar Ledger Statements – also known as ledgers, proposals and with certain terms of vocabulary: illustrations. These are computer printout illustrating a pro- posed policy. They are proposals, not a contract. In guaran- Term Insurance – designed to cover mortality risk for a term teed universal life policies, be sure to review carefully the of years with no cash value build-up. Premiums may increase guaranteed death benefi t safety test part of the illustration. If annually or may be level for a certain period such as 10, 15, any of the factors are not met, the guarantee goes away. 20 or 30 years. Cash Value – the amount of cash available to the owner of Whole Life – designed to provide coverage for the insured’s a policy when the policy is surrendered to the company. In whole life with proceeds payable at death. Premiums may be the early years, the cash value is equal to the reserve less a paid continuously during coverage or on a limited basis for a surrender charge. In later years, it is usually equal or close period of years. Cash value builds up over time. to the reserve value.

Universal Life - also known as fl exible premium or adjustable Guaranteed Cash Value – only in permanent life insurance life, this has a non-fi xed premium which combines increasing policies, it is the guaranteed amount available on the surren- mortality charges with cash accruals in the policy. der of the policy or for loan or other non-forfeiture purposes, according to a table of guaranteed values scaled to the age Universal Life Guaranteed – a fi xed premium contract with of the policy. low and decreasing cash values usually reducing to zero. It is important in these policies to look at the contract provisions Life Settlement – the secondary market in which a policy that impact the guaranteed rate. owner may sell a policy to an investor subject to an agreement to purchase for a price higher than the cash value. Look out Universal Variable Life –guarantees a minimum death for insurability issues here. benefi t, with the actual benefi t possibly being more de- pending on market fl uctuation. Comes with a prospectus Modifi ed Endowment Contracts –taxable as an annuity be- like a security. cause there is more funding in the contract than permitted by the regulations. Make sure that there is language in the Second-to-die – covers the lives of two individuals, payable policy that states that the life insurance policy is not a modi- at the death of the second insured. This can be whole life or fi ed endowment contract (MEC). universal life. Life insurance policies that are owned by a trustee should be Combined – a blend of term and whole life, usually using reviewed periodically, every three years, to evaluate their ef- policy dividends to pay the cost of the term coverage. There- fectiveness. The trustee should look at whether the life insur- fore, if dividends decrease, the insured may have to pay a ance company has de-mutualized since the policy was issued, higher premium. which could impact the amount of the policy’s dividends and the ability of the dividends to offset the policy’s costs. In a Accidental Death - pays for the loss of a life directly caused variable life or universal life contract, if the assumed rate of by an accident. return on the policy was overly optimistic the policy’s cover- age may be compromised. The trustee should request updated Dividends –refund of part of the premium paid at the begin- ledger reports to see how the policy’s dividends compare to ning of the policy year which remains after the company has projections. Finally, the trustee should review whether the set aside the necessary amount of reserve and deductions for insured’s health has changed for the better in which case a claims and expenses. It is a return of premium, not a return more cost-effective policy may be possible. on premium.

Dividend Options – include reduced premium, payment in (continued on page 12)

11 Advanced Estate Planning Institute. . . (continued from page 11)

When reviewing policies for a client, whether in a trust or pay the premiums on the life policy that B owns on B’s life not, here are some of the many suggestions made by David if B agrees to assign the death benefi t of the policy to A. Morris: (i) obtain all of the illustrations and any prospectus; The assumption of a loan by the transferee of a life insur- (ii) carefully study the assumptions that are made in the il- ance policy is also treated as the payment of consideration lustration and the guarantees; (iii) look at the insurer’s ratings for the policy. (published by Joseph Belth, A.M. Best, Moody’s, Standard & Poor, Fitch and the Comdex summaries; a rating of 90 or If the transfer-for-value rule is violated, then the death ben- above is preferable; (iv) consider how long the insurance efi t in excess of the transferee’s tax basis must be treated as company has been in business and how long it has been sell- ordinary income in the hands of the recipient of the death ing the product being considered; (v) determine whether the benefi t. The transferee’s tax basis is that amount equal to policy is medically rated or if there are other restrictions. the consideration plus premiums or other amounts paid by the transferee. For purposes of Code Section 101, interest Life insurance can be very benefi cial in meeting a client’s paid or accrued by the transferee in connection with any estate planning needs. It may provide the necessary cash to loans against the life insurance contract is considered to be cover the family’s income needs, the expenses of an ongoing an amount paid by the transferee. family business or estate taxes associated with valuable but illiquid assets. It can also be used to fund buy-sell arrange- There are two safe harbors exceptions to the transfer-for-value ments or equalize the inheritance among children when not rule. The fi rst exception, known as the “basis exception” oc- all of the children are succeeding to the family’s business. curs when the transferee’s basis in the policy is determined at Having the life insurance policy held by a third party or an least in part by reference to the transferor’s basis. An example irrevocable life insurance trust can reduce estate tax at the of the basis exception is when a policy (free of any loan) is client’s death. As estate planners we can help clients un- gifted by the transferor to the transferee. The transferee, as derstand the different kinds of life insurance products and the recipient of the gift, receives the transferor’s basis in the how life insurance can be used in planning for the needs of policy. A transfer of policies between spouses, or between their estates. former spouses if pursuant to a divorce, is considered to be a gift and thus falls within the exception (this does not apply, Transfer-for-Value Rules however, to same-sex spouses because they are not recog- - Brian R. Della Rocca nized as “spouses” under federal law, including federal tax Della Rocca Law, LLC law). Finally, in the business setting, a transfer of a policy from one business to another that takes place in conjunction In general, Section 101(a)(1) of the Internal Revenue Code with a tax-free reorganization falls within the basis excep- provides that gross income does not include amounts paid tion of the transfer-for-value rule. Interest paid or accrued under a life insurance contract. However, when consideration by the transferee in connection with any loans against the accompanies the transfer of the life insurance policy, the death life insurance contract is considered to be an amount paid benefi t may be subject to income tax. A transfer takes place by the transferee. for purposes of the “transfer-for-value rule” whenever there is an absolute transfer of a right to receive any part of a life When the consideration received by the transferor is less insurance policy and consideration is paid. This could be an than the value of the policy, a part gift/part sale of the policy outright transfer of the ownership of the policy (e.g., A sells occurs. Assume Dad has a $100,000 life insurance policy policy on A’s life to his friend B) or the right to receive any and his basis in the policy is $5,000. The gift tax value of part of the death benefi t of the policy (e.g. A and B enter into the policy is $4,000. Dad sells the policy to his daughter for an agreement that A will name B as benefi ciary of a policy $1,000 resulting in a gift of $3,000 ($4,000 gift value less on A’s life in exchange for consideration from B). Receipt of $1,000 consideration paid.) Because Dad’s basis in the policy life insurance proceeds held as a security for a loan, however, ($5,000) is greater than the consideration ($1,000) paid, this is considered the repayment of capital and thus is not subject scenario falls under the basis exception of the rule. Note, to the transfer-for-value rule. however, that if Dad had taken out a $10,000 loan against the policy, then the IRS would treat the daughter’s assumption of Consideration is any cash payment for the right to receive all that loan as valuable consideration and daughter would have or a portion of the policy – even if a nominal amount is paid. to report ordinary income of $89,000 ($100,000 less [$1,000 Consideration also takes place when reciprocal promises are made between the transferor and the transferee. An example (continued on page 13) of this happens when A, a co-shareholder with B, agrees to

12 Advanced Estate Planning Institute. . . (continued from page 12) cash payment and $10,000 loan assumption]). AMTI is subtracted from ACE and the difference is multiplied by 75% to arrive at adjusted AMTI. ACE is then added to The second safe harbor exception is when the transferee is the the adjusted AMTI. insured, a partner of the insured or a partnership or corpora- tion in which the insured is a partner, offi cer or shareholder. ACE includes sums received by a corporation with respect Therefore, a transfer of a life policy to the insured is not to a corporate-owned life insurance contract (used for buy- considered to be a transfer for value. Transfers of a policy sell agreements). to a grantor trust in which the insured is the grantor would also fall within the exception. The latter is often used as a Internal cash build-up and death benefi ts affect corporate strategy to “fi x” an irrevocable life insurance trust in which AMT. The internal build-up in value of a life insurance policy the terms of the trust are no longer considered appropriate (in the form of increases in the policy’s cash surrender value or desirable. As long as the trust to which the policy is [“CSV”]) is not a taxable event for regular tax purposes; transferred is a grantor trust, the transfer-for-value rule will however, for corporate AMT tax purposes, increases in CSV not be triggered, even if the trust from which the policy has may be a taxable event. Income earned within a life insurance been transferred is a non-grantor trust. contract is included in a C-corporation’s ACE adjustment for the year in which the policy is surrendered. The transfer of a policy to the insured’s business partner falls within the second exception to the transfer-for-value rule A corporation’s ACE includes the amount by which the death even though consideration is paid by the partner. The partner benefi t from the policy exceeds the corporation’s adjusted need hold only a nominal interest in the partnership for the basis in the policy. A corporation’s adjusted basis equals the exception to apply. Likewise, transfers to a partnership in policy’s CSV on last day of year preceding the year of the which the insured is a partner or to a corporation in which insured’s death plus the premium for the year of death. A the insured is an offi cer or shareholder are excluded from corporation has no basis in a term life insurance policy. the transfer-for-value rule even when valuable consideration exchanges hands. Note, however, that the exception does Corporate AMT is not applicable to S-corporations. When not apply to transfer of policies between co-shareholders. A funding a redemption buy-sell agreement with life insurance recommended solution is to have the shareholders be partners owned by a C-corporation, one should buy a life insurance in a partnership outside of the corporation. This works so policy large enough to cover both the purchase price under long as the partnership was not formed for the purpose of the buy-sell agreement and the corporate AMT. The formula avoiding the transfer-for-value rule. for calculating how much insurance is needed is: purchase price under the buy-sell agreement, divided by .85. Careful consideration must be given prior to the transfer of a life insurance policy in order to avoid triggering Transfer-for-Value Problems the transfer-for-value rule. Once a policy is tainted by a violation of the transfer-for-value rule, the policy remains Using life insurance to fund buy-sell agreements can create tainted and its death benefi t subject to income tax, unless a number of transfer-for-value traps, and if a trap is triggered the fi nal transfer is made to a protected party under the the life insurance proceeds received upon the death of the safe harbor exceptions. insured will be taxed as ordinary income. A transfer-for-value problem typically arises out of the desire to fund a buy-sell Use of Life Insurance to Fund Small agreement with policies already in place. There is no exemp- tion from the transfer-for-value rule for the transfer of a life Business Buy/Sell Agreements insurance policy to a co-shareholder. If A transfers a policy – Presented by Daryl J. Sidle, Esq. on his life to B and B does the same with A, a transfer-for- Baxter, Baker, Sidle, Conn & Jones, P.A. value problem arises. In a classic case and a recent private letter ruling, it was held that the mutuality of the shareholders’ Corporate AMT Issues obligations to maintain the policies and to use the proceeds to purchase each other’s stock constituted consideration Corporate alternative minimum tax (“AMT”) applies only for transfer-for-value purposes. The consideration does not to C-corporations that have average gross receipts in excess have to be pecuniary; it can be a promise for a promise. A of $7.5 million. To calculate corporate AMT, it is necessary to ascertain the corporation’s alternative minimum taxable income (AMTI) and its adjusted current earnings (ACE). (continued on page 14)

13 Advanced Estate Planning Institute. . . (continued from page 13) transfer-for-value problem can also occur when a deceased a. The insured was an employee of the poli- shareholder’s estate sells policies on the lives of the surviv- cyholder at any time during the 12-month ing shareholders. period before the insured’s death; or b. At the time the life insurance contract is Pension Protection Act of 2006 (“PPA”) issued, the insured was either: i. A director of the policyholder; The PPA introduced Code Section 101(j). Although life insur- or ance proceeds are normally excluded from a taxpayer’s gross ii. A highly compensated employee income, unless certain conditions are met, Section 101(j) denies or highly compensated individual this exclusion and taxes the amount of life insurance proceeds with respect to the policyholder. which exceeds premiums and other amounts paid by the policy The fi rst exception is of little utility in the buy-sell arena be- owner of an employer-owned life insurance contract. Section cause policy proceeds used to fund a buy-sell agreement are 101(j) applies to any employer-owned life insurance contract not typically paid to a benefi ciary designated by the insured. issued after the date of enactment (August 17, 2006). Rather, they are paid to the corporation.

An employer-owned life insurance contract is defi ned as a life The second exception is often applicable in the buy-sell insurance contract owned by a person or an entity engaged in context; however, the following should be noted: (i) the in- a trade or business (the employer) that covers the life of an sured may be only a shareholder of the company (employer), offi cer, director, or employee of the employer (determined as not an employee; (ii) it is often impossible to inform the of the date the policy is issued) and under which the employer insured of the maximum face amount for which his or her is a direct or indirect benefi ciary of the employer-owned life life can be insured because often this maximum doesn’t exist insurance contract. (buy-sell insurance coverage is often periodically adjusted to refl ect the increased values of the stockholdings of the There are two signifi cant exceptions to the new rule taxing insureds); and (iii) every redemption buy-sell agreement the proceeds of an employer-owned life insurance contract. funded with corporate-owned life insurance must contain a These exceptions are available provided certain notice and notice provision that meets the requirements Section 101(j) consent requirements under Section 101(j)(4) are met. Under (4). NOTE: Cross-purchase agreements are not subject to the notice and consent requirements, before the insurance the new PPA rules. policy is issued, an employee must (i) be notifi ed in writing that the policyholder intends to insure the employee’s life and Using an LLC to Own Buy-Sell Life Insurance what the maximum face amount is for which the employee could be insured at the time the contract was issued; (ii) This applies to cross-purchase buy-sell agreements and provide written consent to being insured under the contract solves the transfer-for-value problems described above. and that such coverage may continue after the insured termi- For example: nates employment; and (iii) be informed in writing that the  The Structure applicable policyholder will be a benefi ciary of any proceeds 1. Assume Corp has 3 shareholders – A, B & C, payable upon the death of the employee. who own 50%, 30%, and 20%, respectively of Corp’s stock. Assume Corp has FMV of If the notice and consent requirements are met, the follow- $1 million. ing exceptions are available to exclude the proceeds of an 2. A, B, & C form an LLC. Each has interest in employer-owned life insurance contract from the gross LLC equal to his percentage of ownership in income of the employer: Corp. 3. LLC purchases life insurance on each of A, B I. The proceeds of an employer-owned life insurance & C. Policy death benefi ts are as follows: A - contract are paid to a member of the insured’s fami- $500,000; B - $300,000; and C - $200,000. ly, to the designated benefi ciary of the insured under 4. Corp pays premiums on the policies. Those the contract (other than the policyholder), to a trust payments are treated as distributions (or com- created for the benefi t of any member of the family pensation) by Corp to A, B & C. of the insured or the designated benefi ciary under  Death of a Shareholder the contract (other than the policyholder); or 1. Assume A dies. II. If the proceeds are used to purchase an equity inter- est in the business: (continued on page 15)

14 Advanced Estate Planning Institute. . . (continued from page 14)

2. Assume LLC has a basis (book and tax) in the death of the grantor, the trust may purchase the non-liquid policy on A’s life of $30,000. This means LLC assets from the grantor’s estate so that the estate has the means has $470,000 of book income upon receipt of with which to pay any estate taxes and other expenses associ- the death benefi t. ated with the administration of the grantor’s estate. 3. Book income is allocated 60% to B and 40% to C. So long as the grantor held no incidents of ownership in the 4. A is redeemed from LLC for an amount equal policy within three years of the grantor’s death, the policy’s to his book capital account. death benefi ts will be excluded from the grantor’s taxable 5. Balance of insurance proceeds are distributed to estate. The ILIT should be both the owner and benefi ciary B and C and used to purchase A’s stock. of the policy. It is best if the ILIT states that the ILIT is ir- 6. If A retires instead of dying, then his interest is revocable and that the grantor waives all of his or her rights, redeemed for his capital account. powers and interest to alter, amend, revoke or terminate the  Benefi ts of the Structure ILIT and to any income or principal under the ILIT. If a 1. Avoids multiple policies policy is transferred to an ILIT (as opposed to the ILIT trustee 2. Insulates policies from creditors of the Corp acquiring a new policy), it is important to value the policy and the shareholders properly and to consider the transfer-for-value rule. 3. Avoids the transfer-for-value rule (relying on key exceptions to the rule for a transfer to a Ideally, life insurance premiums should be paid by the trustee partnership in which the insured is a partner, or of the ILIT and not by the grantor. The grantor should make for a transfer to a partner of the insured) gifts of cash to the ILIT periodically so that the ILIT has 4. Allows special allocation of proceeds cash available to pay the premium when it becomes due. 5. Assures payment of premiums and mainte- The gifts should be deposited by the trustee into a separate nance of policies bank account held in the name of the ILIT. In order for the gifts to the ILIT to qualify as annual exclusion gifts, the ILIT Drafting and Administering Irrevocable should give benefi ciaries a power to withdraw the gift. This Life Insurance Trusts is known as a “Crummey withdrawal right.” - Jay M. Eisenberg, Esq. The Crummey withdrawal right allows the grantor to use an- Shulman, Rogers, Gandal, Prody & Ecker, P.A. nual exclusion gifts to fund the ILIT. As a general rule, a gift to a trust does not qualify as an annual exclusion gift because The benefi t to having an irrevocable life insurance trust the benefi ciaries of the trust do not receive an immediate and (“ILIT”) hold one or more life insurance policies is that it present interest in the gift made to the trust. The Crummey removes the proceeds of the policy from the trust grantor’s withdrawal power, if written into the trust agreement, trans- taxable estate. This is accomplished by making a gift of an forms the grantor’s gift into a present interest by giving each existing policy to the ILIT or by transferring other property withdrawal benefi ciary an immediate and unrestricted right to the ILIT which the trustee then uses to purchase a new to withdraw the gifted money from the trust for a specifi ed policy on the grantor’s life. Additional benefi ts of an ILIT period of time. There is no guidance on how long the period include the grantor’s ability to control how the life insurance must be, but 30 days is considered suffi cient. At the end of proceeds are to be used for the trust’s benefi ciaries. It is also the specifi ed period, the benefi ciary no longer has a power of an excellent way for a grantor to make good use of his or her withdrawal unless the trust agreement provides an additional annual gift exclusions. “hanging power” described below.

The terms of an ILIT are by defi nition, irrevocable, and de- The Crummey right of withdrawal cannot be illusory. Each pend on the completion of a gift by the grantor to the trust. Crummey benefi ciary must be notifi ed by the trustee of his Accordingly, careful drafting is required. An ILIT should or right to withdraw the gift in order for the gift to qualify as be used as part of an estate plan, not in lieu of an estate plan. a present interest gift. The notice should be in writing and An ILIT can hold either a single life or second to die policy. it should be sent promptly each and every time the trustee The type of policy held in the trust should be selected based receives a contribution from the grantor. If a Crummey notice upon the circumstances and needs of the grantor. must be sent to a minor, it will need to be sent to an individual with authority to act on behalf of the minor. If the parent or Typically, an ILIT is created to provide immediate liquidity in large taxable estates that contain non-liquid assets. Upon (continued on page 16)

15 Advanced Estate Planning Institute. . . (continued from page 15) legal guardian of the minor is making the gift to the trust for to the trust will exceed $5,000 or 5% of the which the Crummey notice must be issued, then a third party ILIT’s value per benefi ciary, hanging pow- should be appointed to receive the Crummey notice and to act ers should be considered to avoid a “gift on behalf of the minor benefi ciary. There must be suffi cient over” by the benefi ciary to the trust. With assets in the trust to satisfy any exercise of the power. There a hanging power, the benefi ciary’s lapse of must be no pre-arranged plan for the benefi ciaries to refrain the withdrawal power is expressly limited by from exercising their powers of withdrawal. the greater of $5,000 or 5% of the value of the trust. The amount of the lapse in excess A benefi ciary should never waive his or right to receive of $5,000 or 5% continues to be subject to a the Crummey notice; otherwise the annual exclusion may power of withdrawal by the benefi ciary. In be denied for all gifts made after the waiver. Sending one other words, it “hangs around” subject to the Crummey notice intended to capture all gifts to be made to benefi ciary’s continuing right to withdraw the trust is not recommended. In addition, a benefi ciary’s it. The hanging power continues until some Crummey right to withdraw constitutes a general power of future date, specifi ed in the trust agreement, appointment. Therefore, a benefi ciary should never waive his or until the amount of each beneficiary’s or her right to withdraw as doing so results in the benefi ciary withdraw right is equal to or less than 5% of making a taxable gift to the ILIT. It is best if the annual the value of the ILIT. withdrawal power lapses. 4. Draft for fl exibility and give the trustee broad powers, especially with respect to discretion- The selection of the ILIT trustee is very important. The ary authority to distribute income and prin- trustee should never be the grantor; that would cause the ILIT cipal to the benefi ciaries and with respect to assets to be included in the grantor’s estate. While any other investment decisions for assets of the ILIT. party may serve, the individual selected must be able to carry Give the trustee the right to terminate the ILIT out properly the responsibilities of a trustee during the life and distribute the assets to the benefi ciaries. of the grantor. Such duties include the prompt receipt and Grant the trustee the power to merge any trust deposit of all gifts from the grantor, payment of premiums, created under the ILIT with similar trusts issuance of Crummey notices to benefi ciaries as specifi ed created by the grantor for the benefi t of the in the trust agreement, review of the insurance policies, same benefi ciaries. Defi ne benefi ciaries by maintenance of records and adherence to the terms of the class instead of naming specifi c individuals trust agreement and all fi duciary responsibilities. Spouses by name. Consider giving the grantor’s spouse and family members often do not fully understand how to a limited power of appointment during the administer an ILIT correctly and they are also largely unaware grantor’s lifetime to distribute the ILIT assets of the risks inherent in undertaking such a role. A grantor to their descendants. By drafting for fl exibil- may retain the right to remove and replace the trustee so ity, the trust will be able to accommodate the long as the successor trustee is not a related or subordinate needs of the grantor’s estate and benefi ciaries party to the grantor. as circumstances may change. 5. Drafting the trust as a grantor trust allows the The following drafting points for ILITs were offered for grantor to sell appreciated assets to the ILIT on consideration: a tax-free basis. By having the grantor respon- 1. The requirement to send written Crummey sible for the trust’s income taxes, the grantor’s notices should be expressly stated in the docu- taxable estate is reduced, while the assets in the ment, as well as the period of time in which the trust are preserved for more growth. benefi ciary has to withdraw the gift . 2. With each gift made by the grantor, the grantor If circumstances change so that the terms of the ILIT no lon- should be given the ability to identify which ger meet the grantor’s needs, consider one of two options: benefi ciaries receive a Crummey withdrawal power and the amount of the withdrawal power. (1) Have the ILIT sell the policy to a newly created ILIT Although several benefi ciaries may be eligible (remember that the ILIT buying the policy needs to be a to receive a withdrawal power, the ILIT docu- grantor trust so as not to violate the transfer-for-value rule). ment may be written to allow unequal treatment of the benefi ciaries by the grantor. 3. When it appears likely that the annual gift (continued on page 17)

16 Advanced Estate Planning Institute. . . (continued from page 16)

The original trust can then distribute the cash or note received preciate fully the importance of properly administering in the transaction to the trust benefi ciaries. the trust. To avoid problems, a competent trustee (not the grantor) who is good at record-keeping is critical. If pos- (2) If the grantor is still insurable, have the grantor cease sible, avoid the three year rule for transferred policies and making further gifts to the ILIT so that the policy will lapse. have the ILIT directly purchase a policy on the grantor’s The grantor can create a new ILIT and that ILIT can acquire life. Confi rm that the owner and the benefi ciary of the a new policy. policy is the ILIT. An ILIT is appropriate only if the client fully appreciates its benefi ts and is truly committed to its For an ILIT to work successfully, the client needs to ap- proper administration.

Start Preparing Now! msba annual meeting ocean city, maryland June 12-15, 2013 MSBA’s Annual Meeting offers an opportunity to exchange ideas with colleagues and sharpen your skills through instructional As well as relaxing in sessions and presentations by prominent the sun and the surf. members of your profession. sea. you. there.

Editor’s Note

Our goal is for the Estate and Trust Law Section Newsletter to provide current, useful information on areas of interest to Section members. The Newsletter can be better tailored to suit members’ needs with input from you. If you would like to suggest a future topic, change of format, or submit an article, please contact the Editors at:

Anne W. Coventry Mary Alice Smolarek Pasternak & Fidis, P.C. Wright, Constable & Skeen, LLP 7735 Old Georgetown Road Suite 1100 One Charles Center Bethesda, Maryland 20814-6130 100 North Charles Street 16th Floor (301) 656-8850 Ext. 457 phone Baltimore, Maryland 21201-3812 (301) 656-3053 fax (410) 659-1318 phone acoventry@pasternakfi dis.com (410) 659-1350 fax [email protected]

17 ESTATE AND GIFT TAX STUDY GROUP UPCOMING EVENTS

2012 - 2013

The MSBA Estate and Gift Tax Study Group now meets in two locations; Ober Kaler, 100 Light Street, Baltimore, Maryland, and Shulman Rogers, Gandal, Porty & Ecker, PA, 12505 Park Potomac Avenue, 6th Floor, Potomac, Maryland.

DATE SPEAKER TOPIC

December 20, 2012 Michael Kitces Estate & Income Tax Update Pinnacle Advisory Group

Ron A. Stramberg, ASA & Valuation Issues in January 24, 2013 Douglas E. Braunstein, JD ASA Estate Planning & Estate Tax Klaris, Thomson & Schroeder, Inc.

February 21, 2013 Jeanne Newlon Summary of the 2013 Venable LLP Heckerling Institute

March 21, 2013 TBA TBA

April 18, 2013 TBA TBA

Maryland Comptroller’s Offi ce Division on current matters May 16, 2013 Estate Tax

June TBD, 2013 Benjamin Pruett Directed Trust & Trust Protectors, Bessemer Trust Drafting Considerations

To volunteer to speak or for additional information please contact the co-chairs:

Brian R. Della Rocca, Esquire, Co-Chair Danielle M. Cruttenden, Esquire, Co-Chair Della Rocca Law, LLC Merrill, Cruttenden & Collinson, P.A. 600 Jefferson Plaza, Suite 402 1410 Forest Drive, Suite 32 Rockville, Maryland 20852 Annapolis, Maryland 21403 [email protected] [email protected] Telephone: 301-637-2889 Telephone: 410-268-0006 Fax: 240-238-9881 Fax: 410-269-5126

18 Estate and Gift Tax Implications of Same-Sex Marriage Legislation By David C. Dembert, Esq. Jacobs & Dembert, P.A. At the MSBA Annual Meeting in June, 2012, the author par- Note that portability is not available for same-sex couples ticipated in a panel discussion sponsored by the Tax Section due to the impact of DOMA. dealing with the treatment of same-sex couples by the Internal Revenue Service and other jurisdictions, covering income, B. Focus on Trust Planning for Same-Sex Couples. Leaving estate and gift tax ramifi cations, together with retirement assets outright from one same-sex spouse to the other is not planning and related issues. This presentation followed the advantageous; a double tax will result unless it is clear that the recent enactment of the Civil Marriage Protection Act (the surviving spouse's estate will be less than the applicable exclu- "CMPA") recognizing same-sex marriages in Maryland. The sion amount in effect at the time of his or her death. Instead, CMPA survived the referendum challenge in early November, the recommendation is that a trust be created for the benefi t of and will be effective as of January 1, 2013. The following the surviving spouse, similar to the typical credit shelter trust summarizes the author's comments pertaining to the estate with comparable features. Of course, there are also non-tax and gift tax implications of the CMPA: reasons for utilizing such a trust, including controlling recipi- ents at the death of the surviving spouse, creditor protection, A. Overview. For over 30 years, a central concept of estate and asset management by a trustee. Furthermore, one should and gift tax planning for married couples has been the unlim- consider utilizing a trust that would qualify for the marital ited marital deduction. Spouses are free to leave unlimited deduction in the event DOMA is deemed unconstitutional by assets to each other during lifetime, in the form of a gift, or the Supreme Court in which case marital deduction planning at death, with no estate tax. Accordingly, estate tax planning could be implemented by making appropriate tax elections, has focused on the death of the surviving spouse, when assets without the need to revise documents. typically pass to the next generation. Following decoupling of the Maryland estate tax from the Federal estate tax, we had C. Gift Planning. Maryland has no gift tax; thus, gifting can to modify that approach to some degree and incorporate state- be an effective strategy for shifting assets between same-sex only QTIP planning. For same-sex couples, the focus shifts couples to minimize, if not eliminate, the Maryland estate from delaying tax until the death of the surviving spouse to tax in relatively smaller estates. Furthermore, gifting assets avoiding double taxation, employing concepts that we typi- from a terminally ill same-sex spouse to the other spouse may cally use in multi-generational planning. The predominant completely eliminate the Maryland estate tax if the surviving reason for this focus shift is the Federal legislation known as spouse does not reside in Maryland at the time of his or her the Defense of Marriage Act ("DOMA"), which was enacted death. However, one must also consider the impact of carry- in 1996. Under DOMA, a marriage is defi ned as being only over basis in those transactions. Furthermore, consideration between a man and a woman; accordingly, for Federal trans- must be given to "inadvertent gifts" such as acquisition of fer tax purposes, assets shifting between same-sex couples property by same-sex couples as joint tenants with right of will not qualify for the marital deduction, even though the survivorship, if one spouse contributes more than 50% of couple was married in a jurisdiction recognizing same-sex the purchase price, or, in the case of real property, if it is marriage. The current position of the Comptroller's offi ce is fi nanced, and one spouse pays more than 50% of the debt that the Maryland estate tax is based on the various statutes service. Note that the qualifi ed joint interest concept under comprising the Federal estate tax, with some modifi cations; IRC §2040 will not be applicable. accordingly, same-sex couples cannot utilize Maryland estate tax marital deduction planning such as a state-only QTIP. D. Other Planning Techniques Involving Asset Shifting Be- Thus, same-sex couples need to take maximum advantage tween Same-Sex Spouses. Consideration should be given to of all tax exemptions (annual gift tax exemptions, applicable low-interest loans, making a signifi cant gift to facilitate the exclusion amount) and consider creating trusts for the surviv- use of the exemption of the less wealthy spouse (which can ing spouse, instead of leaving assets outright to the surviving be leveraged with discounted assets), utilizing grantor trust spouse. For same-sex couples with substantial assets, the provisions to further shift wealth (remember that there is no "window" involving the current lifetime gift tax exclusion of married fi ling joint income tax status for Federal purposes $5.12 million offers an opportunity to shift signifi cant assets at this time). In addition, grantor retained annuity trusts from the wealthy spouse to the other spouse and to enable the less wealthy spouse to fully utilize his or her exemption. (continued on page 20)

19 Estate and Gift Tax Implications. . . (continued from page 19)

("GRATs") and qualifi ed personal residence trusts ("QPRTs") on Maryland-only QTIPs in their planning. However, the should be considered. Maryland inheritance tax is not based on the Federal tax; accordingly, the 10% inheritance tax currently in effect for E. Planning Opportunities Unique to Same-Sex Couples. assets passing to same-sex spouses will not apply after the One technique that has not been relevant in our planning for CMPA takes effect. many years is the grantor retained income trust ("GRIT"). Pursuant to IRC §2702, the remainder benefi ciary of a H. Impact of CMPA on Estate Administration. A number GRIT cannot be the grantor's spouse. Since a same-sex of statutory provisions relating to estate administration spouse is not considered to be a spouse under DOMA, then are impacted favorably by the CMPA. These include the the GRIT may work. However, in our current low-interest elective share, priority of the spouse to serve as a Personal rate environment, the potential benefi t of utilizing a GRIT Representative, inheritance rights of the spouse in intestacy, is somewhat suppressed. In a comparable fashion, certain modifi ed administration qualifi cation, family allowance and restrictions with respect to GRATs and QPRTs will also be small estate qualifi cation. inapplicable due to the defi nition of spouse under DOMA, which makes these techniques somewhat more attractive. I. Drafting Suggestions. In preparing wills and trusts for Finally, there is more fl exibility with respect to removal of same-sex couples, we need to pay particular attention to our trustees and appointment of successor trustees under IRC defi nitions of "child", "spouse", and "issue". Furthermore, it §672(c), which prohibits the ability to remove a trustee and is important to incorporate fl exibility in planning for same- appoint a successor trustee who is related or subordinate. sex couples, such as making trusts for the benefi t of the other A same-sex spouse would not be considered a spouse for same-sex spouse eligible for QTIP treatment in the event purposes of that statute. DOMA is deemed unconstitutional.

F. Irrevocable Life Insurance Trusts. This popular technique J. Conclusion. The goals for planning for same-sex couples has even more applicability in same-sex spouse planning. Be remain the same; namely, caring for the other spouse, provid- careful, however, if ILITs are being created by each same- ing for children and minimizing taxation. These goals can sex spouse for the benefi t of the other spouse, as one must still be achieved in this uncertain period of DOMA until such consider the reciprocal trust rules. time as the Supreme Court considers the constitutionality of that law, as there is an increasing expectation that DOMA G. Impact of CMPA on Maryland Estate/Inheritance Tax. may be deemed unconstitutional in time, given recent ap- As discussed earlier, the Comptroller takes the position that pellate decisions. However, practitioners must be aware of the Maryland estate tax is based on the Federal estate tax the traps, take advantage of the techniques that are unique (meaning there is no marital deduction available to same- to the situation, and try to structure as much fl exibility into sex spouses). Accordingly, same-sex spouses cannot rely the plan as possible.

Got News? Please send your professional news or announcements to one of the Editors at:

Anne W. Coventry Mary Alice Smolarek Pasternak & Fidis, P.C. Wright, Constable & Skeen, LLP 7735 Old Georgetown Road Suite 1100 One Charles Center 16th Floor Bethesda, Maryland 20814-6130 100 North Charles Street (301) 656-8850 Ext. 457 phone Baltimore, Maryland 21201-3812 (301) 656-3053 fax (410) 659-1318 phone acoventry@pasternakfi dis.com (410) 659-1350 fax [email protected]

20 Whose Money is it Anyway? A (Short) Discussion of What Happens to an Asset Following a Successful Challenge by a Surviving Spouse for Violation of the Spouse’s Marital Right By Peter W. Sheehan, Jr., Esq. Whiteford, Taylor & Preston LLP

In Karsenty v. Schoukroun, 406 Md. 469 (2008), the Court the question of what happens to an asset if a surviving spouse of Appeals reiterated its long-standing rule that a surviving successfully assails the transfer as a violation of the spouse’s spouse can invalidate certain non-probate property transfers, marital right, and the reported opinions fi nding that the trans- if she or he can prove that the transfer was a “sham,” designed fer at issue violated the surviving spouse’s marital right (of by the decedent to thwart the surviving spouse’s elective which there are only fi ve) are of limited usefulness, likely be- share of the decedent’s estate. A surviving spouse’s elective cause the Court, in those cases, was concerned only with the share, of course, is limited to one-third of the decedent’s net issue before it. For example, in Knell v. Price, 318 Md. 501 estate (or one-half, if there is no issue); thus, it stands to (1990)—the only reported instance in over half a century in reason that, if a surviving spouse succeeds in challenging which the Court held a non-probate transfer to be a violation a non-probate property transfer as a violation of her or his of the marital right—the Court of Appeals simply declared marital right, the surviving spouse is entitled to no more than the transfer at issue to have frustrated unlawfully the widow’s one-third (or one-half) of that particular asset. This begs the right to an elective share and remanded the case with direc- question: who gets the rest of the asset? The answer to that tion that the trial court “enter judgment in accordance with question depends on whether the entire asset should be sent this Opinion”; however, it should be noted that the widow’s back to the estate, and it has signifi cant implications for the lawsuit sought to have the property declared part of the estate, recipients of disputed non-probate property, as well as for and a review of the Register of Wills docket history suggests the personal representatives, creditors, and remainder ben- that this is ultimately what happened. In Mushaw v. Mushaw, efi ciaries of estates—not to mention persons planning for the 183 Md. 511 (1944) and Jaworski v. Wisniewski, 149 Md. distribution of their assets at death, who do not want to their 109 (1925), the Court of Appeals considered appeals from fi nal arrangements to be completely upended when they are trial court decrees that completely invalidated non-probate gone. This unsettled and very muddled issue could be the transfers as violative of the elective share statute and, so subject of an expansive law review article, but here I intend it appears, declared the property at issue to be part of the simply to provide practitioners with a modest primer. decedent’s estate. In both cases, the Court of Appeals, after concluding that transfers at issue improperly ran afoul of the There are two schools of thought in answer to the above spousal share stature, affi rmed the lower court decrees. Thus, question. One is that, in challenging the disputed transfer as it seems that, at least superfi cially, Mushaw and Jaworski a violation of her or his martial right, the surviving spouse is support the proposition that, when a non-probate transfer is seeking to void or unwind the transaction; thus, if the surviv- invalidated as violative of a surviving spouse’s marital right, ing spouse succeeds, the transfer is undone, which necessarily the asset reverts to the estate, of which the surviving spouse means that the asset becomes part of the estate and, as such, may take her or his elective share; however, because neither the property of the personal representative. The other school opinion squarely addressed whether the transfers should be of thought is that, because the action is one for a violation invalidated completely, it probably is not prudent to place of a right belonging solely to the surviving spouse, the as- substantial stock in them. sailed transaction (and the decedent’s fi nal wishes) should not be invalidated any more than necessary to protect the Two even older cases also suggest that we should be cau- rights of the surviving spouse. As aptly stated by Melvin J. tious about reading too much into the holdings of Mushaw Sykes, in his 1949 Law Review article, “If, except for the and Jaworski. In Sanborn v. Lang, 41 Md. 107 (1874), the rights of a surviving spouse, a transfer would be valid, there Court of Appeals reversed a lower court’s decree upholding would seem to be no reason to invalidate it beyond the point a non-probate transfer, pointing out that, because the trans- necessary to give the surviving spouse what she would have fer at issue violated the plaintiff widow’s marital right, the received had the inter vivos transfer not been made.” That transfer was “null and void”; the Court, however, added the latter school of thought seems consistent with the fact that, at qualifi er, “so far as the [widow] is concerned.” (emphasis least historically, it is the surviving spouse (not the personal added). And in Collins v. Collins, 98 Md. 473 (1904), the representative) that fi les an action in equity directly against Court of Appeals affi rmed a lower court decree that, in part, the recipient of the disputed property. required the recipients of the non-probate property to pay the

Research reveals no Maryland case that directly addresses (continued on page 22)

21 Whose Money is it Anyway?. . . (continued from page 21) widow one-third of a certain value, thus suggesting that the tion of the trusts rendered them invalid under the general law widow’s share of the property went directly to her, not to the of trusts. Thus, the above language from Sturgis probably estate. The Collins court also noted that, when non-probate should not be read so broadly to apply to claims brought transfers violate marital rights, equity requires that such a by a surviving spouse for violation of the marital right to a transfer be “set [] aside, so far as it confl icted with these share of the property. rights.” (emphasis added). The phrase “so far as” suggests that a transaction in violation of the marital right should not Thus, it appears that the question raised at the outset of necessarily be invalidated completely. Put simply, what the this article does not have a clear answer yet. One thing is Court of Appeals has said (or, more importantly, not said) in clear from the forgoing cases, however: the issue of what the cases where it found non-probate transfers to be viola- happens to an asset following a successful challenge by a tive of marital rights does not move the needle decisively surviving spouse under Karsenty and its predecessors will in one direction or the other on the question of whether the be litigated at some point. And in litigation, both sides will rest of the disputed asset stays with the intended recipient be working with essentially a blank slate of controlling or reverts to the estate. precedent, making it necessary to consult the case law of other jurisdictions and scholarly articles, and to skillfully Some may be tempted to rely on comments made by the articulate an argument that balances public policy and Court of Appeals in Sturgis v. Citizens Nat’l Bank, 152 Md. doctrinal consistency. Indeed, on one hand, from a public 654 (1927)—a case in which the Court ultimately held that policy standpoint, sending an asset to the estate following the transaction under scrutiny did not violate the surviving a successful attack on the transfer by the surviving spouse spouse’s marital right—to conclude that property transferred could lead to an absurd outcome if the asset is completely in violation of the marital right would become part of the devoured by creditors of the estate before the surviving estate upon a successful attack by the surviving spouse. In spouse’s elective share is paid. On the other hand, there is Sturgis, the Court observed that “the test of completeness something to be said about doctrinal consistency. That is, does not differ when a widow sues directly. . . . [T]he attack is if a transaction is declared void, one could argue that the primarily on behalf of the estate.” But a close reading of that law should treat it as if it never occurred. Thus, it arguably case reveals that the Court was not speaking to the widow’s makes sense that the subject of a transaction that is voided argument that the trusts at issue violated her marital right (an for any reason should revert back to the estate, as if the argument which the Court addressed separately, later in its transaction never occurred. What is certain is that there opinion); rather, when it made the foregoing comment, the are too many people with fi nancial interests in estates for Court was addressing the widow’s argument that the forma- this question not to arise.

SEARCHING THE MSBA ESTATE AND TRUST LAW EMAIL LIST ARCHIVES

For those persons wishing to review past messages on the MSBA Estate and Trust Law Email List, they are archived and can be accessed as follows:

1. Enter the following address in your Internet browser: www.msba.org/?lyris 2. Login using the email address used on the Email List. 3. You will then see listservs of those lists you are subscribed to. 4. Choose the list you wish to view. 5. You will then see a list of recent messages. 6. To search past messages choose “search” from the navigation menu on the left. 7. By using the advanced search options you can search the archives for particular words in the entire message, header, or body, and you can exclude words from the search.

22 2012 - 2013 Section Council Committees

Listed below are some of the Section Council Committees for which Sec- tion members may wish to volunteer their time. Please contact the individuals listed below or the Section Chair if you have suggestions or are interested in helping out.

Committee Contact

Chair Deborah A. Cohn Legislation Mary Beth Beattie Website/Technology David C. Dembert Educational Publications Anne W. Coventry Mary Alice Smolarek Probate Rules/Reform Allan J. Gibber Programs Frank S. Baldino Section Meetings Charles Bagley, IV Orphans’ Court liaison Jay M. Eisenberg Registers of Wills liaison Jonathan D. Eisner Estate and Gift Tax Study Group Liaison Danielle Cruttenden Brian R. Della Rocca Elder Law Section Liaison Jonathan G. Lasley

Join the Estate and Trust Law E-mail List

The Estate and Trust Law Section off ers an active e-mail list which is open to Section members. The e-mail list provides Section members the op- portunity to post questions or comments concerning issues relevant to the practice of estate and trust law. Members may also use the e-mail list to communicate with other Section members on items of general interest to the membership.

To subscribe to the e-mail list, visit the Section’s website at http://www.msba.org/sec_comm/sec- tions/estate and click on the “Email Lists” tab. On the next screen, click on the “Join List” tab to the right of “Estates and Trust Law Section.” You will be asked to enter your name and email address. You will then receive an e-mail that you must reply to in order to verify your e-mail address. When you have been added to the email list, you will receive a welcome message.

Questions or comments about the e-mail list may be directed to the Estate and Trust Law Section care of David C. Dembert at [email protected].

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