Downloaded 17 times
![E “Where are we now11
?” In 2016, Gore decided
not to run for President again, and a mere 12
days after Bowie’s death, Apple refused to give
a widow her dead husband’s Apple ID without
a court order so she could continue to play a
bridge game they had purchased using their
joint iTunes account.12
As fun and interesting (or not) as these facts
might be, they have been listed primarily to make
some important points. First, as will be discussed
more thoroughly below, the two federal acts that
have been causing most of the trouble regarding Ž-
duciary access to digital assets were enacted in
1986, several years before the invention of the
World Wide Web and social media, and well before
virtually anyone actually owned any digital assets.
Second, as recent as UPOAA is, that Act was Žnal-
ized the year before the launch of the iPhone and
the subsequent boom in the growth of social media.
Third, David Bowie was a visionary, both musically
and digitally, who will be missed. Fourth, while Al
Gore can claim only partial credit for creating the
Internet13
, he was another of “the dreamers14
,” be-
ing one of the Žrst to realize the possibilities of
computers in the information age, and he crafted
at least two of the earliest bills to help foster its
growth. Let’s “move on15
.”
“Tomorrow belongs to those who can hear it coming.”
—David Bowie
Tomorrow is coming, and Ohio estate planners
hear it. Digital assets are all around us, and they
are becoming increasingly important to our clients
and their beneŽciaries.
Planning for Žduciaries to access those assets is
becoming increasingly important as well. If Ohio
enacts the UFADAA, part of that enactment is
expected to be an OSBA Estate Planning, Trust
and Probate Law (“EPTPL”) Council proposal to
modify Ohio’s statutory power of attorney form to
make it possible to grant digital asset powers and
to permit agents to access electronic communica-
tions of their principals. This article will discuss
the background problems that agents currently
have in dealing with digital assets, the proposed
statutory changes, and best practices for counsel-
ling clients in dealing with digital asset issues with
powers of attorney.
UPOAA Adequately Deals with Digital Assets, Doesn’t
It?
“If it works, it’s out of date.” —David Bowie
It’s the same old problem all over again. Life
comes at us and our clients in the form of the “re-
ally real,” but the “law16
” exists only as an abstrac-
tion and despite all best attempts, no abstraction
can ever adequately deal with all real-life
situations. As Yogi Berra once said, “It’s like déjá
vu all over again.” The UPOAA seems, and was
intended, to grant to agents all authority necessary
to deal with digital assets of their principals.
UPOAA’s ocial comment to its Section 203 [R.C.
1337.44] states:
Paragraphs (8) and (9) [i.e. R.C. 1337.44 {K} and {L}]
were added to the section to clarify that this compre-
hensive authority includes authorization to com-
municate with government employees on behalf of
the principal, to access communications intended for
the principal, and to communicate on behalf of the
principal using all modern means of communication.
[Emphasis added.]
UPOAA came into existence well into the digital
age, but before the advent of the mobile revolution,
and it was drafted taking into account the need of
agents to be able to access digital records of their
principals. In fact, the so-called “referred” or
“implied” powers of R.C. § 1337.44 expressly grant
to agents the power to “access communications
intended for, and communicate on behalf of, the
principal, whether by mail, electronic transmission,
telephone, or other means” with respect to each
statutory power granted by the principal. More-
over, UPOAA and UFADAA share the same deŽni-
tions for “electronic” and “record,” so nothing more
should be needed. “Would that it were so simple.17
”
While UPOAA arguably grants agents the au-
thority necessary to access digital records, an agent
attempting to access certain electronic communica-
tions of the principal can expect signiŽcant
obstacles. Moreover, the term “digital assets,”
which is not deŽned by UPOAA, encompasses far
more than electronic records.
“Digital assets” include electronically stored infor-
mation, Internet domain names, virtual currencies
like Bitcoin, and online accounts such as email ac-
counts, social networking accounts, banking and
investment accounts, shopping accounts, Web pages,
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![could be of critical importance following the princi-
pal’s death. It is virtually impossible to determine
what might be important later on or after the
principal’s death, so the agent may want to backup
all email records quickly. Many clients do not keep
paper copies of bank or brokerage account state-
ments, relying upon their ability to access those
statements online. Many Žnancial institutions only
provide access to a limited number of prior account
statements (e.g., for the last 12 months), so the
agent may want to download those statements
while they are still available. It is the authors’
opinion, and apparently the opinion of the Justice
Department’s Computer Crime and Intellectual
Property Section,47
that an agent to whom digital
assets powers have been granted would not be
subjected to liability under either federal statute
for logging onto the principal’s account with the
principal’s password, even if that violated the TOS
of the provider. The more practical concern would
be that such a violation could result in the provider
terminating the account.
When an agent begins to act following the
principal’s lack of capacity, it is no longer sucient
to go through the principal’s mail or desk drawers
looking for unpaid bills or records of Žnancial
accounts. Many, if not most, of those types of things
that previously had a paper trail now exist primar-
ily or solely in digital form. Without access to the
principal’s email account, many bills may go
unpaid. Without having access to the principal’s
computer and account passwords, the agent will
not be able to access those Žnancial accounts that
exist primarily on the Internet.
When an Internet-capable device is connected to
an account, at least two computers are involved—
those of the account owner (e.g., the principal’s
laptop) and of the service provider. CFAA arguably
requires that the agent accessing the account have
authority to access the computer on each end. The
principal can clearly grant to the agent authority
to access her computer, but only the service pro-
vider can grant authority to access its server. That
authorization is often denied by Terms of Service
agreements.
For example, Facebook’s TOS provides that “[y]ou
will not solicit login information or access an account
belonging to someone else.” So, although the account
holder may authorize the Žduciary to access the ac-
count, the Žduciary may be exceeding authorized ac-
cess—within the meaning of the CFAA—by logging
into the Facebook account if that access violates
Facebook’s TOS.48
While UFADAA will likely resolve this problem at
both ends, it is possible that amendments may be
needed to both ECPA and CFAA. While there is a
“sense of doubt49
” about whether or not UFADAA
completely provides everything that is needed to
ensure Žduciary access, a totally complete solution
would also involve amendments to these two pre-
Internet acts. ECPA should be amended to add a
ninth exception listing Žduciaries as permissible
recipients of the contents of communications and
both ECPA and CFAA should be amended to deŽne
“authorization” in a way that permits Žduciaries to
grant the required consent.
Conclusion
“The last thing you should do.” —David Bowie
If we are looking for “a new career in a new
town50
,” it is estate planning for digital assets, and
as estate planners, we are “under pressure51
” to
help our clients plan for the disposition of their
digital assets in addition to the usual mix of real
and personal property. As is all too often the case,
the law lags far behind societal trends, as evidenced
by the application of pre-Internet federal law to
online accounts. Fortunately, UFADAA brings us a
world of “wishful beginnings52
,” lighting the way
forward so that problems with the major tech
companies should “slip away53
” The proposed Ohio
modiŽcations to our enactment of UPOAA arm
agents with the fullest level of authority permitted
by the new act. But that is not enough. As estate
planners, we need to make sure that our clients
who are entering their “golden years54
” understand
the scope of the issues presented by digital assets
and provide them and their designated decision
makers with the tools necessary to preserve and to
pass to others all that will remain behind—their
digital footprints: “here today and gone tomorrow55
.”
ENDNOTES:
1
Fascination, from Bowie’s 1975 album Young
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![the deceased class member. Section 2107.52(B)(2)(b)
provides an exception to the general rule when the
class is deŽned as “issue,” “descendants,” “heirs of
the body,” “heirs,” “next of kin,” “relatives,” or “fam-
ily,” or a “class described by language of similar
import.”
In Castillo v. Ott, 2015-Ohio-905 (6th Dist.), the
court determined that “children” was a class
described by language of similar import which
prevented a substitute gift for the deceased child’s
descendants.
The Castillo case involved a will leaving the
estate to decedent’s “children, share and share
alike.” One child predeceased the testator, leaving
children. The Court was forced to choose between
making distribution all to the surviving children or
a share also to the children of the deceased child.
There were no words of survivorship. The Court
analyzed the anti-lapse statute as provided in Sec-
tion 2107.52.
The court held that the language “or a class
described by language of similar import,” includes
a class gift to children. As a result, there was no
substitutionary gift and the children of the deceased
child did not take. The Castillo decision is contrary
to the policy of Ohio’s anti-lapse statute and com-
ments to the Uniform Probate Code, upon which
the statue is based, because each of the other
classes described in Section 2107.52(B)(2)(b) are
multi-generational. A gift to “children,” by contrast,
is a gift to a single generation class.
The problematic language in 2107.52(B)(2)(b)
was taken from the UPC (see 2-603(b)(2) [and
2-707(b)(2)]). The UPC comments distinguish a
multi-generation and a single generation class gift.
Below is the comment to 2-603:
Class Gifts. In line with modern policy, subsection
(b)(2) continues the pre-1990 Code’s approach of
expressly extending the antilapse protection to class
gifts. Subsection (b)(2) applies to single-generation
class gifts (see Restatement (Third) of Property:
Wills and Other Donative Transfers §§ 14.1, 14.2
(2008)) in which one or more class members fail to
survive the testator (by 120 hours) leaving descen-
dants who survive the testator (by 120 hours); in or-
der for the subsection to apply, it is not necessary
that any of the class members survive the testator
(by 120 hours). Multiple-generation class gifts, i.e.,
class gifts to “issue,” “descendants,” “heirs of the
body,” “heirs,” “next of kin,” “relatives,” “family,” or a
class described by language of similar import are
excluded, however, because antilapse protection is
unnecessary in class gifts of these types. They al-
ready contain within themselves the idea of repre-
sentation, under which a deceased class member’s
descendants are substituted for him or her. See Sec-
tions 2-708, 2-709, 2-711; Restatement (Third) of
Property: Wills and Other Donative Transfers
§§ 14.3, 14.4 (2008).
The Ohio statute would be made clear by reference
to the UPC Comment, but the Castillo Court did
not mention the Comment and probably did not
have it. Ohio does not incorporate uniform law com-
ments, and courts tend to read our statutes without
them. The Anti-Lapse Committee1
and Section
Council proposed to clarify that the exception to
the anti-lapse protection applicable to Wills only
applies to gifts to multi-generational classes by add-
ing the following underscored language:
(b) If the devise is in the form of a class gift, other
than a devise to “issue,” “descendants,” “heirs of the
body,” “heirs,” “next of kin,” “relatives” or “family,”
or a class described by language of similar import
that includes more than one generation, a substitute
gift is created in the surviving descendants of any
deceased devisee.
The same statutory language exists in Ohio Trust
Code Section 5808.19(B)(1)(b)(ii). To maintain con-
sistency regarding the interpretation of wills and
trusts, the Anti-Lapse Committee and Section
Council proposed to clarify that the exception to
the anti-lapse protection applicable to Trusts only
applies to gifts to multi-generational classes by add-
ing the following underscored language:
(ii) If the future interest is in the form of a class gift,
other than a future interest to “issue,” “descendants,”
“heirs of the body,” “heirs,” “next of kin,” “relatives,”
or “family,” or a class described by language of simi-
lar import that includes more than one generation, a
substitute gift is created in the surviving descen-
dants of the deceased beneŽciary or beneŽciaries.
Both of the proposed statutory clariŽcations have
been passed by the Screening Committee and by
the Council of Delegates. The clariŽcations are now
ready for a legislative sponsor.
ENDNOTES:
1The Committee consists of Robert Brucken,
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![from serving as guardian, unless otherwise autho-
rized by law.42
Thus neither a nursing home, nor
an employee of the facility, may serve as guardian
for one of their residents. The rules assume that it
is otherwise impossible for a service provider to
impartially advocate for their ward if a problem,
such as a care concern or billing issue would arise.
It would also seem that if an attorney is already
providing legal services to a potential ward, that
they are not eligible to be appointed to serve as
guardian for their client.
Direct service providers cannot pay compensa-
tion or an incentive to a guardian for serving as
guardian.43
In the past, some nursing homes would
pay a monthly stipend or other compensation to
outside guardians for serving residents in the
facility. This practice is now prohibited.
Guardians are cautioned to avoid all actual or
apparent conicts of interest regarding a ward’s
personal or business aairs. If the guardian has
any doubt regarding a potential conict, they
should report the perceived conict to the court for
the court’s review and determination.44
Finally, guardians are prohibited from providing
a direct service to the ward unless authorized by
the court.45
Thus, if an attorney is currently serv-
ing as guardian of a ward, they would be required
to seek court approval prior to providing direct legal
services to the ward.
IMPLEMENTATION BY THE COUNTIES
The purpose of these new rules is to have more
knowledgeable and better educated guardians serv-
ing the needs of their wards. At the same time, the
Supreme Court has also attempted to increase the
court’s involvement in the ongoing administration
of guardianships within the state. Unfortunately,
as experienced practitioners know, the implementa-
tion and interpretation of Superintendence Rules,
as well as statutes related to probate administra-
tion, can vary greatly from county to county. These
new rules are no dierent. SpeciŽcally Rule
66.02(A) permits the local courts to exempt family
members from some, none, or all of these new rules.
In the fall of 2015, a survey was sent to the probate
courts of all 88 counties in Ohio. The courts were
asked courts about their implementation of several
of the new rules. As of September 1, 2015, respon-
ses were received from 52 of the counties. Each
county was asked whether or not they will be
exempting guardians related to their wards by
consanguinity or anity from the new require-
ments related to pre-appointment background
checks, the initial fundamentals class and subse-
quent continuing education classes, and the annual
care plans.
Regarding the background checks, many coun-
ties responded that they were already conducting
background checks on some or all guardianship ap-
plicants, even before the enactment of Rule 66. For
new guardianships, 8 of the responding counties
indicated that they were exempting family member
applicants from the required background checks.46
The educational requirements were the areas
with the most diverse responses from the counties.
Overall 18 of the 52 responding counties either
have a blanket exemption or liberal policies exempt-
ing family members from both the fundamentals
and the continuing education requirements.47
At
least one county already had their own training
classes that they required guardians to attend,48
while others are examining exemption of family
members on a case by case basis, depending on a
variety of factors.49
Only 8 of the responding counties are exempting
family members serving as guardians from the
requirement of preparing and Žling an annual care
plan.50
BUT WHO WILL PAY FOR THESE NEW
MANDATES?
Upon the announcement of the adoption of Su-
perintendence Rule 66, Julia R. Nack, a member of
the drafting committee, stated that “[t]he Supreme
Court Rules are a good step forward, as they move
Ohio towards best practices in guardianship. While
I would like to have seen training and visitation
requirements that were as rigorous as the national
standards envision, these new mandates are a very
positive step.” She continued to say that “[i]t is
important now for Ohio lawmakers to take up the
issue of guardianship and provide the courts with
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![“In analyzing a cost to determine whether it com-
monly or customarily would be incurred by a hypo-
thetical individual owning the same property, it is
the type of product or service rendered to the estate
or non-grantor trust in exchange for the cost, rather
than the description of the cost or service, that is
determinative. In addition to the types of costs
described as commonly or customarily incurred by
individuals in paragraphs (b)(2), (3), (4) and (5) of
this section, costs that are incurred commonly or
customarily by individuals also include, for ex-
ample, costs incurred in defense of a claim against
the estate, the decedent, or the non-grantor trust
that are unrelated to the existence, validity, or
administration of the estate or trust.” 1.67-4(b)(1).
Bundled Fees. “If an estate pays a single fee,
commission or other expense (such as a Žduciary’s
commission, attorney’s fee or accountant’s fee) for
both costs that are subject to the 2-percent oor
and costs (other than a de minimis amount) that
are not, then, except to the extent provided other-
wise in guidance published in the Internal Revenue
Bulletin, the single fee, commission or other
expense (bundled fee) must be allocated, for pur-
poses of computing the adjusted gross income of
the estate or non-grantor trust in compliance with
section 67(e), between the costs that are subject to
the 2% oor and those that are not.” Reg. 1.67-
4(c)(1).
Special Rule for Non-Hourly Fees. “If a bundled
fee is not computed on an hourly basis, only the
portion of that fee that is attributable to invest-
ment advice is subject to the 2-percent oor; the
remaining portion is not subject to that oor.” Reg.
1.67-4(c)(2).
NOTE: For any “non-hourly” fees (e.g.,
“percentage-of-value” trustee fees, executor com-
missions or “Žxed amount” fees not tied directly to
time spent in providing services), the rule is
nominally more generous. Only “the
portion. . .attributable to investment advice” is
subject to the 2% oor. However, note that “sepa-
rately billed” amounts paid to third parties (see
“Expenses Not Subject to Allocation” immediately
below) are evaluated and categorized separately.
Expenses Not Subject to Allocation. Separately
billed out-of-pocket expenses “are treated as sepa-
rate from the bundled fee”; and “payments made
from the bundled fee to third parties that would
have been subject to the 2-percent oor if they had
been paid directly. . .are subject to the 2-percent
oor, as are any fees or expenses separately as-
sessed by the Žduciary. . .for services rendered to
the estate or non-grantor trust that are commonly
or customarily incurred by an individual.” Reg.
1.67-4(c)(3).
NOTE: For example, if a Trustee charges an
“unbundled” percentage fee, and then “contracts
out” the investment advisory services (i.e., paying
the investment advisor(s) separately “out of” the
Trustee’s “unbundled” fee), then the investment
advisor expense incurred by the Trustee would be
treated as if “directly” paid out of the Trust for
investment advice, and that amount would be
subtracted from the Trustee’s “unbundled fee”
amount and subjected to the 2% oor (with the bal-
ance of the Trustee’s fee presumably not being
subject to the 2% oor).
Reasonable Method. “Any reasonable method
may be used to allocate a bundled fee between those
costs subject to the 2-percent oor and those costs
that are not. . .. Facts that may be considered in
determining whether an allocation is reasonable
include. . .the percentage of the value of the corpus
subject to investment advice, whether a third party
advisor would have charged a comparable fee for
similar advisory services, and the amount of the
Žduciary’s attention. . .that is devoted to invest-
ment advice as opposed to dealings with beneŽcia-
ries and distribution decisions and other Žduciary
functions.” Reg. 1.67-4(c)(4).
SPECIFIC EXAMPLES SET FORTH IN THE
REGULATIONS
The Regulations include some speciŽc examples
of costs subject to the 2% oor and other costs that
are not subject to the 2% oor:
Ownership Costs. “Ownership costs are costs
that are chargeable to or incurred by the owner of
the property simply by reason of being the owner of
the property. . ..[O]wnership costs are commonly
and customarily incurred. . .[and] include, but are
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![September, 2015. Cathy intimated that the new
Regulations would be similar to the Greenbook
proposals.
On August 31, 2015, Richard L. Dees (“Richard”),
a partner at McDermott Will & Emory, and one of
the foremost authorities on Chapter 14, wrote a 29
page letter to Treasury and the IRS explaining in
detail why the anticipated Regulations would be
invalid3
. Richard said that the anticipated Regula-
tions “would be inconsistent with Chapter 14’s
origin, legislative history, and purpose;” and he
pointed out:
E that the anticipated Regulations would cause
family business equity interests to be taxed at
a higher rate than non-family business equity
interests,
E that Chapter 14 does not distinguish between
passive investment companies and active busi-
nesses, and
E that Treasury does not have the power to
substitute new restrictions for disregarded
restrictions.
On November 6, 2015, Jonathan Blattmacher, a
proliŽc writer and speaker on estate planning top-
ics, reported that Leslie Finlow (“Leslie”) of the
IRS Oce of Associate Chief Counsel stated at the
AICPA Fall Tax Division meeting that the § 2704(b)
regulations will follow the statute - not the
Greenbook. According to Jonathan’s e-mail, Leslie
said “[t]here seems to be some confusion as to
exactly what the guidance will rely on. We are look-
ing to the statute as it is now. We are not looking
at the Greenbook.”
On March 17, 2016, Ron Aucutt (“Ron”), Wash-
ington insider and highly regarded estate planning
lawyer with McGuireWoods, said he believes that
the § 2704 Regulations will aect entities as follows:
E “most safe: Operating businesses.
E next most safe: Entities with assets like rental
real estate.
E most at risk: Entities with marketable securi-
ties and cash.”
Ron also believes that “the source of the restric-
tion” will be important:
E “Restrictions created by the transferor are
most suspect.
E Restrictions created by transferor’s generation
are next.
E Inherited or acquired restrictions are safest.”
Ron did not address how Treasury will have the
authority to accomplish all of these changes with
Regulations.
No one knows exactly when the Regulations will
be issued, but Cathy recently conŽrmed that they
will be out “soon.”
VALUATION OF S CORPORATIONS
In 1999, Judge Halpern issued his decision in
Gross v. Commissioner, T.C. Memo 1999-254, which
was subsequently armed by the Sixth Circuit
Court of Appeals. Gross v. Commissioner, 272 F.3d
333 (6th Cir. 2001). Gross accepted the expert
opinion of Dr. Mukesh Bajaj that in valuing S
corporations, it is not appropriate to reduce earn-
ings by hypothetical corporate level income taxes
when comparing them to C corporation after tax
earnings data. This reduction is commonly referred
to as “tax- aecting.” After Gross, a number of other
cases followed suit.
In 2015, a “Job Aid for IRS Valuation Analysts”
was released by the IRS pursuant to a Freedom of
Information Act request4
. The Job Aid was pre-
pared for internal purposes only and is not an of-
Žcial IRS position. As such, it may not be cited as
authority for any legal position. But, it does give
taxpayers an idea of the IRS position on tax-
aecting. The Job Aid states that “absent a com-
pelling showing that unrelated parties dealing at
arms-length would reduce the projected cash ows
by a hypothetical entity level tax, no entity level
tax should be applied in determining the cash ows
of an electing S corporation.”
The Job Aid goes on to say that “personal income
taxes paid by the holder of an interest in an elect-
ing S corporation are not relevant in determining
the fair market value of that interest.” These IRS
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![positions are not surprising given the judicial sup-
port they have received. But, there is also some
good information for taxpayers. The Job Aid says
that “pass-through entities should be, where at all
possible, compared to other pass-through entities
in the valuation process.” While comparable pass-
through data is hard to Žnd, valuation Žrms will
likely Žgure this out.
Several speciŽc factors that “may deserve special
attention” are discussed:
E it may be harder for S corporations to raise
debt and equity capital due to the limited
number of interest holders, the single class of
stock, and the “straight debt” rule.
E the “impact of these requirements should be
evaluated as part of determining an appropri-
ate rate of return to be used in the valuation.”
E since the types of investors are restricted for S
corporations, the “pool of hypothetical buyers
might be smaller than would otherwise be the
case.” The Summary lists factors for “speciŽc
consideration by the Valuation Analyst”:
E “size and composition of the pool of hypotheti-
cal buyers.”
E “economic interests of the hypothetical seller.”
E “actual revenues available to and the actual
expenses to be paid by the entity that has
elected to be taxed as an S corporation.”
E “availability at the entity level of equity and
debt capital.”
E “likely holding period of the transferred
interest.”
The Summary concludes by saying that tax-
aecting is inappropriate “absent a compelling
demonstration that independent third parties deal-
ing at arms-length would do so as part of a purchase
price negotiation.” The Job Aid seems to oer a
compromise to taxpayers by arming the prohibi-
tion against tax-aecting while opening the door to
special valuation reductions occasioned by the
unique limitations imposed upon S corporations.
And, as time goes on, more data may be available
on actual transactions involving interests in pass-
through entities so that valuation experts can
compare apples to apples, as the Job Aid suggests.
ESTATE TAX AGGREGATION OF ASSETS
Estate of Bonner, Sr. v. US, 84 F.3d 196 (Fifth
Cir. 1996), was a welcome, and somewhat surpris-
ing, decision from the Fifth Circuit Court of Ap-
peals, in 1996. It held that, for valuation purposes,
QTIP assets included in a surviving spouse’s estate
under § 2044 would not be aggregated with assets
owned outright by the surviving spouse and in-
cluded under § 2033. The Court explained that the
“assets, although taxed as if they passed through
[Mr.] Bonner’s estate, in fact were controlled at
every step by Mrs. Bonner, which a tax valuation
with a fractional discount would reect.”
A few years later, the full Tax Court followed
suit in Estate of Mellinger v. Commissioner, 112
T.C. 4 (1999). In a 33 page Opinion, the Tax Court
explained its reasoning thoroughly. The Court
found that “at no time did decedent possess, control,
or have any power of disposition over the FOH
shares in the QTIP trust. Cf. secs. 2035, 2036, 2041
(requiring inclusion in the gross estate where a
decedent had control over the assets at some time
during her life).” Bonner and Mellinger are fairly
well known cases among the estate planning
community. The general understanding is that for
valuation purposes, QTIP assets included under
§ 2044 are not aggregated with individually owned
assets included under § 2033.
This means that if a QTIP trust held 30% of the
voting stock in a privately owned business and the
surviving spouse beneŽciary of that QTIP Trust
also held 30% of the voting stock in her own name,
both 30% blocks would be valued on a minority
basis. These holdings are favorable to taxpayers
and oer valuable planning techniques to owners of
family businesses. But the general perception of
the holdings could be a trap for estate planners. In
both Bonner and Mellinger, it is clearly stated that
the surviving spouse had no control or power of dis-
position over the QTIP assets.
While QTIP trusts often give no control or power
of disposition to the surviving spouse, that is not
necessarily so with all QTIPs. A QTIP trust might
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![higher downward adjustments for 9.5% and 40.5%
blocks than for 50% blocks. The Court concluded
that the multiple steps were used “solely for tax
purposes” and held that the taxpayer made two
gifts of a 50% interest in the LLC, with credit given
for the amount of each Note.
In Holman the Court declined to impose the step
transaction doctrine when the time interval be-
tween funding the limited partnership and transfer-
ring partnership interests was six days. Cutting it
that close may work, but why take the chance?
There are many step transaction issues reported in
gift tax cases. Even when the taxpayer wins, there
is expense, worry, and aggravation. Consideration
of the step transaction doctrine in each transfer of
partnership interests or LLC Units is essential. It
is not hard to avoid and could be costly if it is not.
ENDNOTES:
1Available on Internet; search “Priority Guid-
ance Plan.”
2
Available on Internet; search “Administration’s
Greenbook.”
3
Available on Internet; search “Richard Dees
Letter.”
4
Available on Internet; search “IRS S Corp. Job
Aid.”
STRUCTURING TRUST
ARRANGEMENTS TO HOLD
FAMILY BUSINESS INTERESTS
By James G. Dickinson, Esq.
Cavitch Familo & Durkin Co., LPA
Cleveland, Ohio 44114
Based on a presentation by the author at the Ohio
ACTEC meeting in Columbus on April 17, 2016
In structuring trust arrangements that will
receive, own, administer and distribute the equity
interests in family-dominated businesses, the plan-
ner should address the following issues:
E fulŽllment of the settlor’s objectives
E protection of the beneŽciaries’ interests
E provision for protecting the Žduciaries
E allowance for necessary modiŽcations
E minimization of taxes
The use of trusts can be traced to the Thirteenth
Century in England where it was necessary to sep-
arate the legal ownership of assets, principally
land, from the beneŽcial equitable interests. Today
the use of trusts where family businesses are
involved calls for removing the ownership and
control of the business interests from those persons
who are to be beneŽted by the business interests.
Treas. Reg. § 301.7701-4(a) states, in part:
“Generally speaking, an arrangement will be treated
as a trust under the Internal Revenue Code if it can
be shown that the purpose of the arrangement is to
vest in trustees responsibility for the protection and
conservation of property for beneŽciaries who cannot
share in the discharge of this responsibility and,
therefore, are not associates in a joint enterprise for
the conduct of business for proŽt.”
The essential nature of the trust arrangement is
that “the beneŽciaries [do] not, qua beneŽciaries,
control trust aairs.” Bedell Trust v. Commissioner,
86 T.C. 1207, 1220 (1986). The separation of control
and beneŽt of owning the assets illustrates the
importance that the trust be administered by the
trustee for the beneŽciaries and that the beneŽcia-
ries’ rights are to monitor and enforce the discharge
of the trustee’s duties, not take over. Aucutt,
Ronald. (2014). Slicing and Dicing: Cutting to the
Core of a Trust. ACTEC 2014 Fall Meeting, New
Orleans.
A “family business” is an enterprise in which
ownership and management are dominated by
members of an emotional kinship group. This group
not only includes spouses and lineal family mem-
bers but collateral relatives, such as siblings,
cousins and in-laws. According to the Small Busi-
ness Administration, family-owned businesses
make up 90% of all business enterprises in North
America and are responsible for 62% of
employment. A study prepared by the Raymond
James Institute included a survey of family busi-
ness owners which concluded that 79% of the
respondents want the business to remain a family
business.
Business succession planning may be deŽned as
present planning for the transfer of ownership and
management of a closely-held business to others.
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![beneŽciaries from attaching the beneŽcial interests
are often the most important reasons for holding the
business interests in trust.
7. Choice of Law. Every jurisdiction has dierent
rules concerning the scope, availability and ap-
plicability of the methods for altering the trust ar-
rangements, the tax consequences of holding the as-
sets in trust as well as the availability of the fora for
the resolution of disputes.
8. In Terrorem Clauses. These clauses can be used to
limit a beneŽciary’s ability to challenge the validity
of the trust arrangement as well as limit a beneŽci-
ary’s ability to question the conduct of the trustee.
Only Indiana and Florida expressly prohibit the
enforcement of in terrorem clauses by statute.
9. Arbitration. Five states expressly allow the use of
mandatory arbitration clauses in trust disputes by
statute or case law. Only the District of Columbia
expressly prohibits the use of mandatory arbitration
clauses in testamentary documents.
10. Tax Avoidance and Minimization. While it is
often the primary purpose of trust arrangements to
reduce estate and generation-skipping taxes by limit-
ing the rights of beneŽciaries it is now more common
to use trusts to allocate the income tax burden be-
tween and among the settlor, the trust itself and the
beneŽciaries.
THE PARTIES TO THE TRUST
ARRANGEMENT.
a. Settlor.
The settlor of the trust arrangement has almost
free rein to structure the terms, duties and respon-
sibilities of the instrument and the parties. The
Ohio Trust Code is primarily a default statute.
Pursuant to OTC § 5801.04(A) the provisions of
the OTC apply only to the extent the settlor has
not provided otherwise in the terms of the trust.
Section 5801.04(B) lists the exceptions that the
settlor may not override in the terms the trust.
Section 5 of the Report on H.B. 416.
b. Trustee.
The duties and responsibilities of the trustee are
determined by the terms of the trust instrument,
the Ohio Trust Code and case law.
i. Duties Upon Assumption of Trusteeship.
1. OTC § 5809.04 describes the duties of a trustee
at the inception of trusteeship. The section es-
sentially provides that within a reasonable time
after accepting a trusteeship or receiving trust as-
sets, a trustee shall review the trust assets and
make and implement decisions concerning the
retention and disposition of trust assets. The
trustee should bring the trust portfolio into compli-
ance with the requirements and standards of the
Ohio Uniform Prudent Investor Act.
2. Proper management of closely-held business as-
sets requires the trustee to undertake additional
responsibilities. The trust instrument should
provide speciŽc guidance to the trustee of the se-
ttlor’s expectations in managing the business
interests. In his authoritative treatise, Fiduciary
Management of a Closely-Held Business, Sheldon
G. Gilman states that upon assumption of a
trusteeship, the trustee should engage in due dili-
gence in understanding the closely-held businesses
that will constitute the corpus of the trust. Gil-
man, Sheldon G., Fiduciary Management of a
Closely-Held Business, section 4.3 (UK/CLE)
(2007). (hereinafter cited as “Gilman”). The Ameri-
can College of Trust and Estate Counsel has
published a guide for clients serving as trustee.
The guide was prepared by the Fiduciary Matters
Subcommittee of the ACTEC Practice Committee.
3. Corporate Žduciaries often have their own
checklists and guidelines for due diligence in ac-
cepting and administering closely-held business
interests.
ii. On-Going Duties of the Trustee Holding Closely-
Held Business Interests.
Chapter 5808 of the OTC sets forth the duties of the
trustee in the administration of a trust. Whenever a
trustee intends to own and to operate a closely held
business, including in corporate form, extraordinary
measures must be undertaken to fulŽll the Žduciary
duties to the beneŽciaries of the trust. Under com-
mon law and prior statutory law, trusts and estates
were generally limited or prohibited in continuing
the operation of businesses. See Bogert & Bogert,
Trusts and Trustees (2 Ed. Rev.1980) 303-304, sec-
tion 573 (“The power to authorize continuance [of
the business] applies to sole proprietorships, and to
cases of partnerships * * *. It also applies to the con-
tinuance of a business through complete or majority
stock control of a corporation * * *.”). Huntington
National Bank v. Wolfe, 99 Ohio App.3d 585, 651
N.E.2d 458 (10th Dist. 1994); see, also, In re Estate
of Kurkowski, 487 Pa. 295, 301, 409 A.2d 357 (1979).
Duty to Diversify Assets. OTC § 5809.03 states that
the trustee may invest in any kind of property or
type of investment provided that the investment is
consistent with the requirements and standards of
the Ohio Uniform Prudent Investor Act. The section
goes on to say that a trustee shall diversify the
investments of the trust unless the trustee reason-
ably determines that, because of special circum-
stances, the purposes of the trust are better served
without diversifying. The limitations imposed on
investment powers of all Žduciaries by ORC
§ 2109.37 provide “except as otherwise provided by
law,. . ., or by the instrument creating the trust,. . .”
Even before the adoption of the Ohio Trust Code,
Ohio courts held that a corporate trustee had a
mandatory duty to diversify trust assets unless there
were special circumstances that excused diversiŽca-
tion, even though the trust speciŽcally permitted the
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![tion decisions or any other decision aecting the
administration of the trust. In general a directed
trust is often deŽned as a trust in which the trust
instrument itself instructs the trustee to make
investment decisions as directed by a person named
in the trust agreement instrument. This practice
was codiŽed in 1986 in Chapter 33, Title 12 of Del-
aware Code.
The Ohio Trust Code speciŽcally allows “other
persons” to direct the trustee and they will be
considered a Žduciary except to the extent other-
wise provided by the terms of the trust. The holder
of a power to direct is liable for any loss that results
from a breach of a Žduciary duty. OTC § 5808.08
(D).
Protection for the Trustee. OTC § 5815.25
provides a trustee following the orders of a third-
party greater protection than the provisions of the
UTC. The Report on H. B. 416 states:
“A signiŽcant dierence between UTC § 808(b) and
§ 5815.25 [referenced in § 5808.08(B)] is that the
UTC provision does not protect a trustee who follows
directions if the act the trustee is directed to perform
‘is manifestly contrary to the terms the trust or the
trustee knows the attempted exercise would consti-
tute a serious breach of a Žduciary duty that the
person holding the power owes to the beneŽciaries of
the trust.’ Section 5815.25, like RC § 1339.43,
includes no such limitation on the protection aorded
a trustee who follows directions from one with the
authority to direct.”
Unless the governing instrument provides other-
wise, the advisor is a Žduciary. The particular advi-
sor language included in the trust instrument
depends upon the purpose for which the trust is
created and the reason why the advisor is
appointed. There are innumerable reasons why set-
tlors create directed trusts and it would be impos-
sible to include all of the language used over the
years creating trusts with trust advisors. The most
frequently used terms are:
a. Trust Advisor—a trust advisor is generally a third
party whose responsibility is to advise the trustee
with respect to discretionary distributions to the ben-
eŽciaries as well as with certain limited investment
options.
b. Trust Protector—a trust protector is generally a
third party that holds powers a trustee does not pos-
sess such as the ability to remove the trustee, amend
trust terms or change beneŽciaries. Trust protectors
are often given the power to terminate a trust and to
order the distribution of its assets. Some trust
protectors are given the authority to grant general
powers of appointment to named beneŽciaries.
c. Investment Advisor or Committee
d. Distribution Advisor or Committee
Consent Advisor or Directed Advisor? The
terms of the trust instrument will require the
trustee to either follow the express directions of the
advisor or merely to seek the consent of the advisor
before taking action. The document should clearly
reect the default if the trustee seeks the consent
of the advisor and the advisor fails to respond. Is it
still incumbent upon the trustee to make recom-
mendations to an advisor when the document
expressly mandates that the trustee follow the
directions of the advisor?
Protection for the Trust Protector. What is
the liability of a trust protector for failing to moni-
tor and adjust the actions of the trustee? In 2013
the Court of Appeals of Missouri, Southern District,
First Division discussed the liability of a trust
protector for failing to replace an errant trustee as
well as exercise other duties imposed upon him by
the trust instrument. Robert T. McLean Irrevocable
Trust U/A/D March 31, 1999 v. Ponder, 418 S.W.
3d 482 (Mo. App. S.D. 2013).
Liability for Actions of a Cotrustee. OTC
§ 5807.03 discusses the liability of cotrustees.
Subsection (E) states that a trustee may delegate
to a co-trustee duties and powers that a prudent
trustee of comparable skills could properly delegate
under the circumstances. Subsection (G) provides
that each trustee shall exercise reasonable care to
prevent a cotrustee from committing a serious
breach of trust and to compel a cotrustee to redress
a serious breach of trust. A trustee is not required
to exercise reasonable care of that nature under
this division and a trustee is not liable for resulting
losses, when section 5815.25 of the Revised Code is
applicable or there is more than one other trustee
and the other trustees act by majority vote. Subsec-
tion (H) provides that a dissenting trustee who
joins in an action at the direction of the majority of
the trustees and who notiŽed any cotrustee of the
dissent at or before the time of the action is not li-
able for the action.
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Ohio Probate Law Journal Article
- 1. IN THIS ISSUE: Publisher’sMessage 179 Editor’s Message 179 Digital Assets and Fiduciaries, Help is on the Way! 179 By Mark A. Watson, Esq Spiders from Mars: UPOAA, UFADAA & Ziggy Stardust 182 By Richard E. Davis, Esq. Matthew R. Hochstetler, Esq. Wills and Trusts: Updating Ohio’s Pre-Mortem Validation Law 191 By Ralph Lehman, Esq. Ohio’s Anti-Lapse Statute and the Proposed Statutory Response to Castillo v. Ott 197 By Brian Layman, Esq. Superintendence Rule 66 and its Impact on Your Guardianship Practice 199 By Colleen B. Laux, Esq. Conicts of Interest in Estate Administration 205 By J. Michael Cooney, Esq. Summary of Gehrke v. Senkiw, 2016-Ohio-2657 207 By Richard Kolb, Esq. Unbundling of Trustee Fees and Other Expenses Under Treas. Reg. 1.67-4 209 By Kevin G. Robertson, Esq. Valuation: Beyond the Basics 212 By William R. Graf, Esq. Structuring Trust Arrangements to Hold Family Business Interests 219 By James G. Dickinson, Esq. Passing the Baton to the Next Generation: Law Practice Succession Planning 226 By William J. McGraw, III, Esq. Sarah G. Worley, Esq. Case Summaries 230 Subject Index 232 Legislative Scorecard 235 PUBLISHER’S MESSAGE The Probate Law Journal of Ohio is available on WestlawNext, starting with Volume 11 (September/October 2000). The database is searchable by author name, article title, date, text, source, and citation. For subscription inquiries please call 1-800-328-9352. EDITOR’S MESSAGE The OSBA Council of Delegates has approved four more legisla- tive recommendations from the EPTPL Section. Those proposals relate to digital assets, predeath probate of wills and trusts and clariŽcation of the antilapse statutes. They are listed in the Legisla- tive Scorecard of this issue of PLJO. It is probably too late to add them to the pending omnibus bill (HB 432), but they may form the core of a new omnibus bill in the new General Assembly next spring, making them eective perhaps two years from now. DIGITAL ASSETS AND FIDUCIARIES, HELP IS ON THE WAY! By Mark A. Watson, Esq* Stubbins, Watson & Bryan Co., LPA Zanesville, Ohio Chairman EPTPL Section Committee on Access to Digital Assets “Digital Assets.” Just a few years ago that phrase was rarely mentioned by lawyers and their clients. Yet as technology has evolved, the average person on the street has acquired one or more email accounts, a computer, “smart phone,” and possibly a tablet device. The average person on the street deposits checks in a bank account by using a phone app and hasn’t visited the local bank branch in weeks. The average person on the street makes purchases *The author would like to thank Roy A. Krall, Esq., Chairman of the EPTPL Section Council, for his assistance with the preparation of the Report to the Council of Delegates. MAY/JUNE 2016 VOLUME 26 ISSUE 5 PROBATE LAW JOURNAL OF OHIO Mat #41851861
- 2. online with auser name and password and even manages his or her investment portfolio in “the cloud.” Today, the average person on the street has “Digital Assets” and wants to be able to control those assets just like traditional assets. Over the past few years articles have been pre- sented in this Journal articulating the need to ad- dress digital asset issues for clients and their Žduciaries.1 On April 8, 2016 the Screening Com- mittee of the OSBA Council of Delegates heard the report of the Estate Planning, Trust and Probate Law (EPTPL) Section recommending adoption of the 2015 Revised Uniform Fiduciary Access to Digital Assets Act drafted by the National Confer- ence of Commissioners on Uniform State Laws (NCCUSL). A question was raised at the Screening Committee meeting. Since Revised UFADAA could overlap into Intellectual Property law, should OSBA act on the Revised UFADAA proposal or wait until the OSBA Intellectual Property Section had a chance to review the proposal? Two responsive com- ments were made: 1) Intellectual Property lawyers were involved in the creation of Revised UFADAA and 2) Revised UFADAA requires uniformity from state to state thereby limiting the ability to make substantive changes at the state level. The Screen- ing Committee approved the EPTPL recommenda- tion and the proposal advanced to the full Council of Delegates. The EPTPL report to the Council of Delegates is set forth below. SUMMARY AND RATIONALE FOR PROPOSAL. Use of the internet has dramatically changed how people communicate, store documents and transact business. Many have access to the Internet and use internet service providers and software to deal with such things as banking, investing, email- ing, document storage and purchasing. State and federal laws restrict access to these “digital assets” by Žduciaries and state laws dier greatly. Some states have enacted laws that touch on some of the issues Žduciaries face when dealing with digital as- sets and electronic communications but many states, including Ohio, have no statutory authority. Moreover, the terms-of-service agreements of internet service providers generally govern how these digital assets are dealt with. The inability to access these digital assets by executors or adminis- trators, trustees, guardians, and agents acting under a power of attorney can be frustrating to devastating. The EPTPL Section of OSBA formed a commit- tee to study issues relating to Žduciary access to digital assets several years ago. The committee soon realized that the nature of these assets requires a uniform approach across the entire country and concluded that Ohioans would be best served if action was postponed until a uniform law was available for review. In late 2015, the Revised Uniform Access to Digital Assets Act (Revised UFADAA) was ap- proved and recommended for enactment in all states by NCCUSL. The EPTPL committee made PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 K2016 Thomson Reuters. All rights reserved. PROBATE LAW JOURNAL OF OHIO (ISSN 1050-5342) is a journal on probate law and practice in Ohio, edited by Robert M. Brucken, Retired Partner, Baker & Hostetler, Key Tower, 127 Pub- lic Square, Suite 2000, Cleveland, Ohio 44114. It is issued 6 times per year from September 1 through August 31; published and copyrighted by Thomson Reuters, 610 Opperman Drive, P.O. Box 64526, St. Paul, MN 55164-0526. POSTMASTER: send address changes to PROBATE LAW JOURNAL OF OHIO, 610 Opper- man Drive, P.O. Box 64526, St. Paul, MN 55164-0526. Opinions expressed are those of the authors or advertisers and not necessarily those of the Publisher or Robert M. Brucken, Editor- in-Chief. Correspondence should be addressed to the Editor-in-Chief. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission in writing from the Publisher. Subscription inquiries: 1-800-328-9352. This publication was created to provide you with accurate and au- thoritative information concerning the subject matter covered; however, this publication was not necessarily prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other professional advice and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the ser- vices of a competent attorney or other professional. For authorization to photocopy, please contact the Copyright Clearance Center at 222 Rosewood Drive, Danvers, MA 01923, USA (978) 750-8400; fax (978) 646-8600 or West’s Copyright Services at 610 Opperman Drive, Eagan, MN 55123, fax (651) 687-7551. Please outline the speciŽc material involved, the number of copies you wish to distribute and the purpose or format of the use. 180 K 2016 Thomson Reuters
- 3. local terminology changesfor Ohio but did not change the act substantively in order to safeguard pre-existing approval by various internet service providers, including Google and Facebook. Both of these companies have expressed written approval of and adherence to statutes not materially dier- ent from Revised UFADAA. Facebook indicated speciŽcally that uniformity among states was quite important to it. Revised UFADAA modiŽes the original Uniform Access to Digital Assets Act (2014) which was im- mediately opposed by privacy advocates and many internet service providers and technology companies. In fact, a competing Act was proposed by technology companies called the Privacy Expec- tations Afterlife and Choices Act (PEAC ACT). PEAC failed to deal with many of the problems Žduciaries have in dealing with digital assets and electronic communications. In order to resolve these dierences and draft suitable legislation, NCCUSL included many opponents of UFADAA in the discussions to arrive at Revised UFADAA. It is believed that Revised UFADAA alleviates most of the concerns of the opponents to UFADAA while still giving Žduciaries appropriate access to digital assets. Revised UFADAA deals with four common types of Žduciaries: 1) Executors or Administrators of deceased persons’ estates; 2) Court appointed Guardians or Conservators of Wards; 3) Agents under a power of attorney; 4) Trustees. Under the Act, Internet users have several options: If the custodian (the company that stores the user’s digital assets on their servers) provides for an online tool, the user may use the online tool to designate who may access the user’s digital assets. If a custodian does not provide an online tool option or if the user declines to use an online tool, the user may give enforceable directions for access to their digital assets in traditional estate planning documents such as a will, trust or power of attorney. If there are no directions given by a user with an online tool or in the user’s estate plan- ning documents, the terms-of-service agreements of the user’s accounts will determine Žduciary access; and if the terms-of-service agreements are silent regarding Žduciary access, the default rules of Revised UFADAA will apply. The Act has several purposes: (1) It gives Ohio Internet users the ability to plan for the management of their digital as- sets and electronic communications by Žduciaries. (2) It creates a system to deal with conicting instructions regarding access to these digital assets. (3) It provides Žduciaries the legal authority to access and manage electronic communica- tions and digital assets while still respecting an owner’s reasonable expectations to privacy. (4) It gives internet service providers (custodians under the Act) legal authority to deal with Žduciaries of their customers. On April 27, 2016 the OSBA Council of Delegates unanimously approved the proposal of the EPTPL Section recommending adoption of the NCCUSL 2015 Revised Uniform Fiduciary Access to Digital Assets Act. Twenty-nine states have either intro- duced or passed Revised UFADAA as of the end of April, 2016. Ohio will be the 30th state to introduce the act and the process of securing a sponsor in the General Assembly is under way. Ohioans and their Žduciaries should soon have the ability to manage and control digital assets with statutory authority. ENDNOTES: 1See, e.g., Lenz, Death and Downloads: The Evolving Law of Fiduciary Access to Digital Assets 23 No. 1 Ohio Prob. L.J. NL 2, Sept/Oct. 2012; Dunn, Estate Planning and Administration in the Digital Age, 25 No. 1 Ohio Prob. L.J. NL 2, Sept./ Oct. 2014; Watson, Proposal; Authorizing Access to Digital Assets by Fiduciaries, 25 No. 4 Ohio Prob. L.J. NL 4, Mar./Apr. 2015; Lenz, Fiduciaries and Digital Assets: Is the Cloud Finally Lifting?, 26 No. 3 Ohio Prob. L.J. NL 3 Jan./Feb. 2016. PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 181K 2016 Thomson Reuters
- 4. SPIDERS FROM MARS:UPOAA, UFADAA & ZIGGY STARDUST By Richard E. Davis, Esq. Krugliak, Wilkins, Griths & Dougherty Co., L.P.A. Canton, Ohio Member, PLJO Editorial Advisory Board and Matthew R. Hochstetler, Esq. Day Ketterer Ltd. Canton, Ohio One can hardly study the subject of the Uniform Power of Attorney Act (“UPOAA”) and the Uniform Fiduciary Access to Digital Assets Act (“UFADAA”) without becoming aware of the uncanny coinci- dences involving those acts and the lives of the amboyant David Bowie and the ultra-square Al Gore. Consider these “stranger than Žction” parallels: E Within roughly a 12-month period in 1947 and 1948, both David Robert Jones (later known as David Bowie) and Albert Arnold “Al” Gore, Jr. were born. E In the 1970s, Bowie morphed into Ziggy Star- dust, becoming arguably the greatest rock star of the decade, while simultaneously Congress- man Gore was the lone voice in Congress promoting the “fascination1 ” of high-speed telecommunications as an engine for economic growth. E The National Conference of Commissioners on Uniform State Laws (nka the Uniform Law Commission) Žnalizes the Uniform Durable Power of Attorney Act in 1979, as David Bowie completes his Berlin Trilogy and Al Gore serves his second term in the House of Representatives. E In 1986, Congress enacts the Electronic Com- munications Privacy Act2 (the “ECPA”) and the Computer Fraud and Abuse Act3 (the “CFAA”); Bowie stars in Jim Henson’s cult classic Labyrinth as Jareth, the Goblin King; and Gore introduces the Supercomputer Net- work Study Act of 1986. E The World Wide Web is invented in 1989, just as Bowie and his new band Tin Machine release their self-titled debut album, a copy of which was undoubtedly purchased by Tipper Gore so that her Parents Music Resource Center could review its lyrics. E In another 12-month span in 1991-1992, the computer service Prodigy allows subscribers to send 30 free emails per month, Gore drafts the High Performance Computing Act of 1991 (commonly referred to as “The Gore Bill”)4 , and Bowie asks supermodel Iman to “be my wife5 .” E As a result of Gore’s 1993 call for the creation of a “nationwide information superhighway,” Mosaic (later Netscape) is released, sparking the Internet boom of the 1990s, increasing the “speed of life6 ” for all of us. E In 1996 and 1997, while Gore is serving in two important positions—Vice President of the United States and President of the Senate— Bowie receives two important awards: he is inducted into the Rock and Roll Hall of “Fame,7 ” and he receives a star on the Hol- lywood Walk of Fame. E Responding to Gore’s call, in 1998, Bowie launches BowieNet8 , the Žrst artist-created Internet service provider, and the next year he releases the Žrst album by a major artist available for download prior to its physical release. A press release from the U.K. said it was “logical” that Bowie would be on the cut- ting edge of digital development. E In 2006, UPOAA is put in Žnal form by the Uniform Law Commission, Bowie is honored with the Grammy Lifetime Achievement Award and appears in Christopher Nolan’s thriller The Prestige, and Gore’s Academy Award winning Žlm An Inconvenient Truth is released. E In 2007, Steve Jobs introduces Apple’s “savior machine9 ,” the iPhone, launching the mobile revolution; Al Gore is awarded the Nobel Peace Prize; and Bowie takes some well- deserved time o. E Realizing that “love is lost10 ,” Al and Tipper Gore split in 2010. PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 182 K 2016 Thomson Reuters
- 5. E “Where arewe now11 ?” In 2016, Gore decided not to run for President again, and a mere 12 days after Bowie’s death, Apple refused to give a widow her dead husband’s Apple ID without a court order so she could continue to play a bridge game they had purchased using their joint iTunes account.12 As fun and interesting (or not) as these facts might be, they have been listed primarily to make some important points. First, as will be discussed more thoroughly below, the two federal acts that have been causing most of the trouble regarding Ž- duciary access to digital assets were enacted in 1986, several years before the invention of the World Wide Web and social media, and well before virtually anyone actually owned any digital assets. Second, as recent as UPOAA is, that Act was Žnal- ized the year before the launch of the iPhone and the subsequent boom in the growth of social media. Third, David Bowie was a visionary, both musically and digitally, who will be missed. Fourth, while Al Gore can claim only partial credit for creating the Internet13 , he was another of “the dreamers14 ,” be- ing one of the Žrst to realize the possibilities of computers in the information age, and he crafted at least two of the earliest bills to help foster its growth. Let’s “move on15 .” “Tomorrow belongs to those who can hear it coming.” —David Bowie Tomorrow is coming, and Ohio estate planners hear it. Digital assets are all around us, and they are becoming increasingly important to our clients and their beneŽciaries. Planning for Žduciaries to access those assets is becoming increasingly important as well. If Ohio enacts the UFADAA, part of that enactment is expected to be an OSBA Estate Planning, Trust and Probate Law (“EPTPL”) Council proposal to modify Ohio’s statutory power of attorney form to make it possible to grant digital asset powers and to permit agents to access electronic communica- tions of their principals. This article will discuss the background problems that agents currently have in dealing with digital assets, the proposed statutory changes, and best practices for counsel- ling clients in dealing with digital asset issues with powers of attorney. UPOAA Adequately Deals with Digital Assets, Doesn’t It? “If it works, it’s out of date.” —David Bowie It’s the same old problem all over again. Life comes at us and our clients in the form of the “re- ally real,” but the “law16 ” exists only as an abstrac- tion and despite all best attempts, no abstraction can ever adequately deal with all real-life situations. As Yogi Berra once said, “It’s like déjá vu all over again.” The UPOAA seems, and was intended, to grant to agents all authority necessary to deal with digital assets of their principals. UPOAA’s ocial comment to its Section 203 [R.C. 1337.44] states: Paragraphs (8) and (9) [i.e. R.C. 1337.44 {K} and {L}] were added to the section to clarify that this compre- hensive authority includes authorization to com- municate with government employees on behalf of the principal, to access communications intended for the principal, and to communicate on behalf of the principal using all modern means of communication. [Emphasis added.] UPOAA came into existence well into the digital age, but before the advent of the mobile revolution, and it was drafted taking into account the need of agents to be able to access digital records of their principals. In fact, the so-called “referred” or “implied” powers of R.C. § 1337.44 expressly grant to agents the power to “access communications intended for, and communicate on behalf of, the principal, whether by mail, electronic transmission, telephone, or other means” with respect to each statutory power granted by the principal. More- over, UPOAA and UFADAA share the same deŽni- tions for “electronic” and “record,” so nothing more should be needed. “Would that it were so simple.17 ” While UPOAA arguably grants agents the au- thority necessary to access digital records, an agent attempting to access certain electronic communica- tions of the principal can expect signiŽcant obstacles. Moreover, the term “digital assets,” which is not deŽned by UPOAA, encompasses far more than electronic records. “Digital assets” include electronically stored infor- mation, Internet domain names, virtual currencies like Bitcoin, and online accounts such as email ac- counts, social networking accounts, banking and investment accounts, shopping accounts, Web pages, PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 183K 2016 Thomson Reuters
- 6. blogs, photo-sharing accounts,video-sharing ac- counts, video game accounts, Žle storage accounts, and more.18 Despite the clear intent of UPOAA, if Ohio enacts UFADAA, changes will also be made to the Ohio version of UPOAA to take full advantage of the digital access aorded by UFADAA. This is not because of any deŽciency with UPOAA itself, but because of what is almost certainly an unintended interpretation of two federal laws passed in 1986. Federal Law Complications “Turn and Face the Strange” —David Bowie Many technology companies take the position that they cannot release information regarding their customer’s accounts to Žduciaries because of two federal laws—the Electronic Communications Privacy Act19 (the “ECPA”) and the Computer Fraud and Abuse Act20 (the “CFAA”). ECPA was a 1986 amendment to the Omnibus Crime Control and Safe Streets Act of 1968 (sometimes referred to as the Wiretap Act), and its primary purpose was to extend government restrictions on wiretaps from telephone calls to include electronic data by computer. CFAA, which was also passed in 1986, is aimed primarily at criminalizing the hacking of computers of the federal governmental and Žnancial institutions.21 It is clear that neither act sought to limit Žduciary access to digital assets, but because it has been held that any device capable of being connected to the Internet is a protected computer under CFAA,22 it is “little wonder23 ” that the posi- tion of many tech companies has become intransigent. Fortunately, this problem is less com- mon “outside24 ” Silicon Valley. Much has been written about problems raised by the ECPA and the CFAA with regard to Žduciary access to electronic communications.25 The former prohibits providers of electronic communications services from disclosing the contents of electronic communications,26 unless one of eight exceptions applies, and under the latter, the government may charge a person with a crime when that person exceeds authorized access to a digital account.27 The two ECPA exceptions applicable to agents under powers of attorney are: (1) to an addressee or intended recipient of such com- munication or an agent of such addressee or intended recipient; * * * (3) with the lawful consent of the originator or an addressee or intended recipient of such communica- tion, or the subscriber in the case of remote comput- ing service. In the context of powers of attorney, under both ECPA and CFAA, an agent needs “authorization” to access the principal’s account, and under ECPA’s third (but not the Žrst) exception, the provider may only disclose the contents of the communication with the “lawful consent” of the principal (assum- ing that the principal was the originator or the intended recipient); otherwise, the custodian can only release information about the principal’s account. Neither “authorization” nor “lawful con- sent” is deŽned.28 An agent who, with the principal’s consent, uses the principal’s password to access the principal’s account may commit a crime under CFAA if the Terms of Service (“TOS”) agreement of the service provider prohibits the sharing passwords or other- wise prohibits anyone other than the owner from accessing the account. The U.S. Department of Justice asserts that § 1030(a)(2) of the Computer Fraud and Abuse Act is broad enough to permit the government to charge a person with a crime for violating the CFAA when that person “exceeds authorized access” by violating the access rules of a Website’s Terms of Service contract or use policies. This position was stated by Richard Downing, Deputy Chief of the DOJ’s Com- puter Crime and Intellectual Property Section, Crim- inal Division, in testimony presented on November 15, 2011, before the U.S. House Committee on Judi- ciary, Subcommittee on Crime, Terrorism, and National Security. However, Mr. Downing also testi- Žed, “Let me be very clear that the DOJ is in no way interested in bringing cases against the people who lie about their age on a dating site or anything of the sort. We don’t have time or resources to do that.”29 Applying a 1986 cybercrime bill to an agent with digital-asset powers for accessing the Facebook or Gmail account of the principal in violation of the TOS makes as much sense as interpreting the Second Amendment—drafted at a time when the only guns available were front-end muzzle load- ers—as protecting the right to own privately and to PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 184 K 2016 Thomson Reuters
- 7. carry openly automaticassault ries capable of shooting 600 rounds a minute. Yet that is where we are, in both cases, making us feel “unwashed and somewhat slightly dazed30 .” “Speak in extremes, it’ll save you time.” —David Bowie Here’s “what’s really happening31 .” A reasonable interpretation of ECPA, as well as its legislative history,32 both allow Žduciaries to be able to step into the shoes of the account holder whose interests the Žduciary represents; however, many tech companies assert that the prospect of Žnes under ECPA and the threat of criminal sanctions under CFAA make them “tumble and twirl33 ” forcing them to interpret those acts in the most restrictive way possible to protect themselves from potential liability. In this regard, agents under powers of attorney appear to be in a better position than any other Ž- duciary, because the ECPA permits the custodian of electronic communications to divulge the con- tents to the intended recipient of the communica- tion or to the intended recipient’s agent. Three things should be noted. First, this merely permits the custodian to reveal the contents of the com- munication; the custodian cannot be compelled by anyone to release the communication. Secondly, the contents can only be released to the agent of the recipient, not to the agent of a sender. While it might be criminal for an agent to access the ac- count because, for example, the TOS limits access solely to the account owner, the service provider is permitted to give the agent the contents of com- munication sent to (but not sent by) the account owner. In other words, an agent attempting to ac- cess the email account of his or her principal would only be permitted to access the inbox, but not the “sent” folder! Third, ECPA exceptions (1) and (3) signiŽcantly overlap; however (3) requires “lawful consent” while (1) does not. UPOAA is Getting an Upgrade “Ch-ch-ch-ch-Changes.” —David Bowie To overcome the purported challenges posed by federal law and to fully avail an agent of the pow- ers granted by UFADAA, the EPTPL Council has proposed two revisions to UPOAA. The Žrst proposed revision to UPOAA deŽnes an agent’s digital-asset powers by adding a new sec- tion to Revised Code Chapter 1337. UFADAA lists those things that a power of attorney can authorize an agent to do, but it remains necessary for the power of attorney document to actually grant those powers. Accordingly, the EPTPL Council chose to assemble the Žve things that UFADAA permits an agent to do into one digital asset power. DeŽning an agent’s digital-asset powers in this way will make it easy for principals to authorize their agents to do everything agents are permitted to do under UFADAA. The proposed new section reads as follows: Unless the power of attorney otherwise provides, language in a power of attorney granting general authority with respect to digital assets causes the agent to be an authorized user for the purpose of ap- plicable computer fraud and unauthorized computer access laws and authorizes the agent to do all of the following: (A) have access to any catalog of electronic com- munications sent or received by the principal; (B) have access to any other digital asset in which the principal has a right or interest; (C) have the right to access any of the principal’s tangible personal property capable of receiving, storing, processing, or sending a digital asset; (D) take any action concerning the asset to the extent of the account holder’s authority; (E) have access to the content of electronic com- munications sent or received by the principal. The new section will mesh well with UPOAA’s existing provisions. Revised Code § 1337.44 allows a principal to grant many powers to an agent with respect to various subject matters by referencing one or more subjects listed in Revised Code §§ 1337.45-58. Consolidating digital-asset powers into one subject-matter section means a principal will be able to grant all of these powers by refer- ence to the digital asset powers without having to list the Žve digital asset powers individually in the power of attorney.34 The second revision to the statutory power-of- attorney form in Revised Code § 1337.60 is the ad- dition of two new lines which the principal can initial. The Žrst of these is to grant the statutory digital assets powers referred to in the preceding paragraph. By initialing the second new line, the principal indicates consent to the release of the content of electronic communications to the agent. As discussed above, exception (3) to the ECPA’s PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 185K 2016 Thomson Reuters
- 8. prohibition of releaseof the content of electronic communications allows the release with the “lawful consent” of the originator or recipient. It was the Council’s belief that lawful consent, whatever that might mean, likely cannot be granted by means of a statutory deŽnition of digital asset powers, but instead probably requires the actual consent of the principal. The proposed UPOAA statutory deŽni- tion of digital-asset powers includes authorization for the agent to access the content of electronic com- munications, but it is not clear whether referring to the statute will be sucient to shelter the agent and the digital account custodian from liability. Including an express grant of authority in the power of attorney should satisfy the lawful consent requirement, thereby allowing the custodian to release the content of the communication to the agent without facing the prospect of signiŽcant li- ability under CFAA. What Can My Clients and I Do Until UFADAA Passes? “I can see light at the end of the tunnel and it isn’t a train.” —David Bowie “I’ve come to the realizations that I have absolutely no idea what I’m doing half the time.” —David Bowie Grant the Digital-Asset Powers Now. Clients will not need to execute new powers of attorney follow- ing enactment of UFADAA if they include the proposed statutory power in their power of attorney documents now. If the statutory form is used, the grant of this power should be set forth under the section entitled “Special Instructions.” The sug- gested form is: My agent shall have the authority with respect to digital assets to exercise all powers that an absolute owner would have and any other powers appropriate to achieve the proper investment, management, and distribution of any kind of computing device of mine, any kind of data storage device or medium of mine, any electronically stored information of mine, any user account of mine; and any domain name of mine. SpeciŽcally, my agent shall (1) have access to any catalog of electronic communications sent or received by me, (2) have access to any other digital asset in which I have a right or interest, (3) have the right to access any of my tangible personal property used to store any of my digital assets, (4) have the power to take any action concerning the asset to the extent of my authority, and (5) have access to the content of electronic communications sent or received by me. This authorization is to be construed to be my lawful consent under the Electronic Communications Privacy Act of 1986, as amended; the Computer Fraud and Abuse Act of 1986, as amended; and any other applicable federal or state data privacy law or criminal law. Second, the principal should authorize third par- ties with whom the principal maintains accounts to release information to the agent. UFADAA will provide for that authorization, but until its enact- ment, the better practice might be to have clients sign separately a broad authorization, as set forth below, simply because some tech companies seem incapable of understanding the concept that P authorizing A to access P’s electronic communica- tions necessarily includes P’s consent to the disclo- sure of those communications to A. Many providers will accept the agent’s authority to deal with digital assets if a grant of that power is set forth in the power of attorney. For those who will not, a copy of the authorization could be provided. A suggested form (which addresses the release of information to the agent and other Žduciaries) is: I hereby authorize any person or entity that pos- sesses, custodies, or controls any electronically stored information of mine or that provides to me an electronic communication service or remote comput- ing service, whether public or private, to divulge to my then-acting Žduciaries at any time: (1) any electronically stored information of mine; (2) the contents of any communication that is in electronic storage by that service or that is carried or main- tained on that service; and (3) any record or other information pertaining to me with respect to that service. The terms used in this authorization are to be construed as broadly as possible, and the term “Žduciaries” includes an agent acting under a power of attorney signed by me, a guardian appointed for me, a trustee of my revocable trust, and the executor of my estate. This authorization is to be construed to be my lawful consent under the Electronic Com- munications Privacy Act, the Stored Communica- tions Act, the Computer Fraud and Abuse Act, and any other applicable federal or state data privacy law or criminal law. This authorization is eective immediately. Unless this authorization is revoked by me in writing while I am competent, this authoriza- tion continues to be eective during any period that I am incapacitated and continues to be eective after my death. Unless a person or entity has received actual notice that this authorization has been validly revoked by me, that person or entity receiving this authorization may act in reliance on the presump- PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 186 K 2016 Thomson Reuters
- 9. tion that itis valid and unrevoked, and that person or entity is released and held harmless by me, my heirs, legal representatives, successors, and assigns from any loss suered or liability incurred for acting according to this authorization. A person or entity may accept a copy or facsimile of this original autho- rization as though it were an original document.35 Educate the Client. Many clients do not recognize the value of their digital assets. Assets with little perceived worth (such as a 10-year-old Toyota Corolla their son drives, a seldom-used bank ac- count that contains only a couple of thousand dol- lars, or a “small plot of land36 ”) are often not volunteered by clients in a discussion of their assets. Because most clients are looking for a “miracle goodnight37 ” rather than a host of post-incapacity or death problems, a short discussion about how a low-value asset can trigger the need for probate estate administration often opens their eyes from their “moonage daydream38 ” making them realize the importance of properly planning for all of their assets—not just the ones they perceive to be the most valuable. Saying, “I keep forgettin’39 ” a typical client will often fail to mention digital assets the value of which is primarily sentimental, assuming that we, as planners, are only concerned with assets having Žnancial value. Clients need to provide for access to their terabytes of pictures on Flickr or their thoughts and impressions of daily life in their Gmail and Facebook (but probably not Ashley Mad- ison) accounts, upon their disability or death. Discuss with clients what data they would regret losing if their computer, mobile phone, or other de- vice were to be lost or destroyed, and what infor- mation on those devices might be critically impor- tant to their agents in the event of their incapacity. Undoubtedly, “some are40 ” already thinking about this. Clients Must Inventory Their Digital Assets. Clients should be asked to make a list of all of their electronic devices, email addresses, personal websites, social media sites, cloud-storage services, media-sharing sites, banking and brokerage ac- counts, and the usernames, passwords, and secu- rity questions and answers for each. A good tem- plate is Minneapolis Attorney Jim Lamm’s Digital Audit form.41 Because such a list contains so much sensitive information, it should be kept in a secure location able, and the agent to whom the digital as- set powers are granted should be aware of the exis- tence and location of the list. Tech-savvy clients should be encouraged to use password-management software (e.g., LastPass or Dashlane), which stores usernames and passwords in a digital “vault” that is unlocked by us-ing a master password. The vault can be often synchro- nized across devices and operating systems to make accessing passwords convenient as well as secure. Some pass-word-management software has the op- tion to allow the software to “autoŽll” usernames and passwords, which is faster than reviewing a printed list and less tedious than typing the (ide- ally) secure password into the website. Even though the password vault is secure, the master password along with instructions on how to access the password vault should be locked away. As with a physical listing of the principal’s digital inventory, the agent to whom the digital asset pow- ers are given must be able to access the password vault, if and when it becomes necessary for the agent to act. Clients Must Use Strong, Unique Passwords and Update Them Regularly. Once your clients’ user- names and passwords have been cataloged, it is important that they are kept updated. While many corporate IT procedures require passwords to be changed at regular intervals, few Websites have such a requirement. Still, changing passwords to Websites periodically is wise because it reduces the risk that a password will be compromised. Two password managers, LastPass and Dashlane, make this process easy by updating your passwords on many popular Websites with a few clicks.42 Other similar programs are available, and we should tell our clients to “try some, buy some43 .” Cliord Stoll, who is known for his pioneering work in computer counter-espionage, oers a good rule of thumb: “Treat your password like your toothbrush. Don’t let anybody else use it, and get a new one every six months.” Strong passwords are critical. Generally, a strong PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 187K 2016 Thomson Reuters
- 10. password should beeight characters long or longer, not contain any words or names, include at least one capital letter, one lower-case letter, one num- ber, and one special character (such as an asterisk or ampersand), and be is signiŽcantly dierent from prior passwords for that site.44 Using password- management software that has an autoŽll feature eliminates the downside of long, complicated passwords. Many password managers will also generate strong passwords for you, which makes long, strong passwords easier than shorter, less- secure ones that you create yourself. Using unique passwords on each Website reduces the risk that a compromised password will have catastrophic results. In 2010, the New York Times reported that hackers stole 32 million passwords from an online gaming company, and that of those stolen, 20% (about 6,400,000) shared 5,000 com- mon passwords.45 For a user who also utilizes one common password on multiple sites, the cost of that data breach would be much higher than for a user committed to using a unique password for each account. Clients whose passwords are secured using a password manager should be periodically reminded to update the master password. A hard copy should be kept in a secure place like a safe, to which the agent has access. Clients Should Use Multi-Factor Authentication. Accounts that require multi-factor authentication (“MFA”—sometimes called two-factor authentica- tion) need more than just a password to obtain access. A password is one factor, and the second factor is often a one-time-use code. The code might be sent by email or text (to a pre-approved phone number), or it might be generated by a computer or smartphone app (e.g., Authy or Google Authenticator). Even if a client’s password is stolen or breached, an account protected by MFA may still be secure. Clients with MFA accounts must be sure their agents have access to their computers, phones, and other devices or the agents may be shut out of certain accounts despite having the password. Attorneys Should Not Keep Clients’ Passwords. Attorneys should generally not oer to keep a copy of a client’s passwords. An attorney’s Žles may seem like an ideal place to keep passwords, but if a password is compromised, the attorney may face allegations that he or she disclosed a password to someone other than the client. The only time an attorney should consider keep- ing a client’s password is if the account for that password is also secured by multi-factor authentica- tion in addition to the password. Clients Should Regularly Backup Their Digital Assets. Important information (whether on a com- puter, smartphone, or other device) should be regularly backed up. The fastest, most cost-eective solution is physical storage in the client’s posses- sion (e.g., external hard drive, DVD, or ash drive), but this method is often subject to the same risks as the original source. Floods, Žres, and theft can result in the loss of both the original data and the backup. While online backup services are typically slower, the fact that the physical servers will lo- cated at a distant location virtually assures that the backup will not be susceptible to the same risks as the original data. The best backup plan is one that incorporates both local media and online services. Name the “Right46 ” Agent. Many clients name as their agent someone who lacks even the most rudimentary computer skills. Dealing with online custodians of digital accounts can be expected to present challenges for any agent, and those chal- lenges could well be insurmountable if the wrong agent is selected. In these cases, consideration should be given to suggesting to the client that a separate power of attorney be executed that deals with the digital powers only, appointing an agent who would have a higher degree of competence in dealing with digital assets. Act Quickly Upon Incapacity. An agent may need to act quickly upon the principal’s disability. Many free online email services delete accounts following relatively short periods of inactivity. Some clients use email folders as their Žling system for impor- tant information, and a review of the content of emails is sometimes the only way to learn of the existence of intra-family loans or of the amounts currently owed on such loans—information that PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 188 K 2016 Thomson Reuters
- 11. could be ofcritical importance following the princi- pal’s death. It is virtually impossible to determine what might be important later on or after the principal’s death, so the agent may want to backup all email records quickly. Many clients do not keep paper copies of bank or brokerage account state- ments, relying upon their ability to access those statements online. Many Žnancial institutions only provide access to a limited number of prior account statements (e.g., for the last 12 months), so the agent may want to download those statements while they are still available. It is the authors’ opinion, and apparently the opinion of the Justice Department’s Computer Crime and Intellectual Property Section,47 that an agent to whom digital assets powers have been granted would not be subjected to liability under either federal statute for logging onto the principal’s account with the principal’s password, even if that violated the TOS of the provider. The more practical concern would be that such a violation could result in the provider terminating the account. When an agent begins to act following the principal’s lack of capacity, it is no longer sucient to go through the principal’s mail or desk drawers looking for unpaid bills or records of Žnancial accounts. Many, if not most, of those types of things that previously had a paper trail now exist primar- ily or solely in digital form. Without access to the principal’s email account, many bills may go unpaid. Without having access to the principal’s computer and account passwords, the agent will not be able to access those Žnancial accounts that exist primarily on the Internet. When an Internet-capable device is connected to an account, at least two computers are involved— those of the account owner (e.g., the principal’s laptop) and of the service provider. CFAA arguably requires that the agent accessing the account have authority to access the computer on each end. The principal can clearly grant to the agent authority to access her computer, but only the service pro- vider can grant authority to access its server. That authorization is often denied by Terms of Service agreements. For example, Facebook’s TOS provides that “[y]ou will not solicit login information or access an account belonging to someone else.” So, although the account holder may authorize the Žduciary to access the ac- count, the Žduciary may be exceeding authorized ac- cess—within the meaning of the CFAA—by logging into the Facebook account if that access violates Facebook’s TOS.48 While UFADAA will likely resolve this problem at both ends, it is possible that amendments may be needed to both ECPA and CFAA. While there is a “sense of doubt49 ” about whether or not UFADAA completely provides everything that is needed to ensure Žduciary access, a totally complete solution would also involve amendments to these two pre- Internet acts. ECPA should be amended to add a ninth exception listing Žduciaries as permissible recipients of the contents of communications and both ECPA and CFAA should be amended to deŽne “authorization” in a way that permits Žduciaries to grant the required consent. Conclusion “The last thing you should do.” —David Bowie If we are looking for “a new career in a new town50 ,” it is estate planning for digital assets, and as estate planners, we are “under pressure51 ” to help our clients plan for the disposition of their digital assets in addition to the usual mix of real and personal property. As is all too often the case, the law lags far behind societal trends, as evidenced by the application of pre-Internet federal law to online accounts. Fortunately, UFADAA brings us a world of “wishful beginnings52 ,” lighting the way forward so that problems with the major tech companies should “slip away53 ” The proposed Ohio modiŽcations to our enactment of UPOAA arm agents with the fullest level of authority permitted by the new act. But that is not enough. As estate planners, we need to make sure that our clients who are entering their “golden years54 ” understand the scope of the issues presented by digital assets and provide them and their designated decision makers with the tools necessary to preserve and to pass to others all that will remain behind—their digital footprints: “here today and gone tomorrow55 .” ENDNOTES: 1 Fascination, from Bowie’s 1975 album Young PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 189K 2016 Thomson Reuters
- 12. Americans 2 18 U.S.C. 2510. 3 18U.S.C. 1030. Title 2 of ECPA is referred to as the Stored Communications Act. 4“Among the many technological achievements that resulted from the funding of the Gore Bill, was the development of Mosaic in 1993, the World Wide Web browser software which is credited by most scholars as beginning the Internet boom of the 1990s.” Wikipedia article on High Performance Computing Act of 1991. 5 “Be My Wife,” a single released by Bowie in 1977. 6”Speed of Life” was Bowie’s Žrst instrumental and is in his 1977 album Low. 7”Fame” was recorded by Bowie and released in 1975. 8 For $19.95 per month, users got a yourname@d avidbowie.com email address, 5MB of online stor- age to create a personal web page, access to exclusive audio and video, and a chat room which included live chats with Bowie himself. 9 “Saviour Machine” is from Bowie’s 1970 album The Man Who Sold the World. 10 ”Love Is Lost” is from Bowie’s album The Next Day. 11“Where Are We Now?” is the Žrst track on Bowie’s 2013 album, The Next Day. 12“Widow who wanted her dead husband’s Apple ID so she could play games on their iPad is refused and told to get a COURT order instead,” DailyMail. com, January 20, 2016. 13 See Stix, Gary, “Gigabit Gestalt: Clinton and Gore Embrace an Activist Technology Policy,” Sci- entiŽc American, (May 1993, at 122-126). 14 “The Dreamers” is the 10th track on Bowie’s 1999 album, Hours, which has the distinction of be- ing the Žrst complete album by a major artist avail- able for download over the Internet prior to its physical release. 15“Move On” is from Bowie’s 1979 album Lodger. 16“Law (Earthings on Fire)” is from Bowie 1997 album Earthlings. 17Spoken by the character Hobie Doyle, in the Coen Brothers Žlm Hail, Caesar 2016. See https://w ww.youtube.com/watch?v=kGpsXuMvApo. 18From a January 28, 2015 ACTEC letter to the Senate Subcommittee on Privacy, Technology and the Law and the House Subcommittee on Courts, Intellectual Property, and the Internet. 1918 U.S.C. 2510. 2018 U.S.C. 1030. Title 2 of ECPA is referred to as the Stored Communications Act. 21 The focus of CFAA was the prevention of cybercrime against federal computers and bank computers, by proscribing unauthorized disclosure of protected information related to “national defense or foreign relations,” “restricted data. . . as deŽned in . . . of the Atomic Energy Act,” “infor- mation that . . . could be used to the injury of the United States.” CFAA also prohibits the unautho- rized access of Žnancial records of Žnancial institu- tions or from any department or agency of the United States. Only incidentally does the CFAA prohibit unauthorized access to “information from any protected computer.” 22A protected computer is deŽned as a computer “which is used in or aecting interstate or foreign commerce,” which in turn has been judicially construed as any electronic device capable of being connected to the Internet. United States v. Mitra, 405 F.3d 492, 495-96 (7th Cir. 2005), a’d, 134 F. App’x 963 (7th Cir. 2005), cert. denied sub nom. In Mitra v. United States, 546 U.S. 979 (2005), the Court held that any instrument capable of access- ing the Internet, including cell phones and iPods, falls within the deŽnition of “computer” under the CFAA. 23 Little Wonder” is from Bowie’s 1997 album Earthling. 24 “Outside” is the title of a Bowie 1995 concept album. 25 For a detailed discussion of this issue, see The Digital Death Conundrum: How Federal and State Laws Prevent Fiduciaries from Managing Digital Property, James D. Lamm, Christina L. Kunz, Damien A. Riehl, and Peter John Rademacher, Uni- versity of Miami Law Review, Vol. 68, 385. 2618 U.S.C. § 2702(a) prohibits a provider of an electronic communication and computing services from knowingly divulging the contents of a person’s electronic communications. 27 18 U.S.C. § 1030 provides: (a) Whoever (2) intentionally accesses a computer without au- thorization or exceeds authorized access, and thereby obtains— (C) information from any protected computer; shall be punished as provided in subsection (c) of this section. 28LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1132-33 (9th Cir. 2009) interpreted “authorization” as meaning any permission at all. 29Digital Passing: Oh, What a Tangled Web We Weave, James D. Lamm, 58th Annual Estate Plan- ning Seminar, Seattle, WA (Oct. 21, 2013). 30 Unwashed and Somewhat Slightly Dazed” is from Bowie’s 1969 album David Bowie. 31”What’s Really Happening?” is from Bowie’s 1999 album Hours. 32 In Senate Report 99-541 from the Committee PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 190 K 2016 Thomson Reuters
- 13. on the Judiciary,the analysis of § 2702 states the following: The exceptions to the general rule of nondisclo- sure provided in subsection (b) fall into three cate- gories. The Žrst category are those disclosures which are authorized by either the sender or receiver of the message. Either the sender or the receiver can directly or through authorized agents authorize further disclosures of the contents of their electronic communication. (Emphasis added.) 33 “Tumble and Twirl” is from Bowie’s 1984 album Tonight. 34Access to the content of the principal’s elec- tronic communications should be expressly granted in the power of attorney because it is not clear whether reference to the statutory section is suf- Žcient to comply with federal law. 35Supra, n. 12, at pages 418-9, with minor revi- sions tailoring the provision to Ohio law. 36“A Small Plot of Land,” is from Bowie’s 1995 album Outside. 37”Miracle Goodnight” is from Bowie’s album Black Tie White Noise. 38 ”Moonage Daydream” is a Bowie song from his 1972 breakout album The Rise and Fall of Ziggy Stardust and the Spiders from Mars. 39 David Bowie recorded a version of the song for his 1984 album Tonight. 40 ”Some Are” is a song by Bowie recorded dur- ing the Low sessions in 1976 and released as a bonus track on the release of Low in 1991. 41 Available at http://www.digitalpassing.com/wo rdpress/wp-content/uploads/2012/08/DigitalAudit. pdf. 42 Paul, Ian, “How to change your passwords automatically with Dashlane and LastPass,” Mac- World, May 6, 2016, accessible at http://www.macw orld.com/article/3065969/security/how-to-change-yo ur-passwords-automatically-with-dashlane-and-last pass.html#tk.rss all. 43“Try Some, Buy Some” is a 1971 George Har- rison song. A longtime admirer of the song, Bowie version is in his 2003 album Reality. 44 “Tips for creating a strong password,” acces- sible at http://windows.microsoft.com/en-US/windo ws-vista/Tips-for-creating-a-strong-password. 45 Id. 46“Right” is a song from Bowie’s 1975 album Young Americans. 47See n. 16, supra. 48Supra, n. 12, at page 401. 49“Sense of Doubt” is an instrumental piece writ- ten by Bowie for his 1977 album Heroes. 50“A New Career in a New Town” is an instru- mental piece by Bowie from his 1977 album Low. 51 “Under Pressure” is a 1981 song originally re- corded by Queen and David Bowie, and later included on Queen’s 1982 album Hot Space. 52 “Wishful Beginnings” if from the 1995 album Outside. 53“Slip Away” is Bowie’s homage to New Jersey “Uncle” Floyd Vivino, a vaudeville-styled comedian. 54 “Golden Years” is from Bowie’s 1975 album Station to Station. 55“Here Today and Gone Tomorrow” was not written by Bowie, but he performed it on his Diamond Dogs tour in 1974, and it was released as a bonus track on the 1990 Rykodisc reissue of the live album David Live. WILLS AND TRUSTS: UPDATING OHIO’S PRE-MORTEM VALIDATION LAW By Ralph Lehman, Esq. Logee, Hostetler, Stutzman & Lehman Wooster, Ohio Chairman, EPTPL Committee for Validation of Wills and Trusts Before Death Currently, Ohio law allows a living testator to have the probate court determine if the testator’s will is valid and, if determined to be valid, to prevent a post-death challenge to the will. The Estate Planning, Trust and Probate Law Section of the Ohio State Bar Association (OSBA) has pro- posed modiŽcations to the procedure, and to allow a similar procedure for trusts. The proposal would replace Sections 2107.081 to 2107.085 of the Revised Code with Chapter 5817 of the Revised Code. Current Ohio Law. Ohio’s current pre-mortem statute provides that: E The complaint must be Žled in the probate court located in the testator’s county of domi- cile and, if not domiciled in Ohio, the county in which any of the testator’s real property is located.1 E The complaint must name the following as defendants: beneŽciaries under the will, and those who would inherit if the testator died on the date the complaint is Žled.2 E After notice to all defendants, the court con- ducts a hearing.3 PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 191K 2016 Thomson Reuters
- 14. E The courtwill declare the will valid if it Žnds that the will was properly executed and that the testator had testamentary capacity and was not under restraint.4 E If determined valid, the will is sealed and Žled in the oces of the probate court. Only the testator can remove it during the testator’s lifetime and, if removed, the declaration of va- lidity no longer has any eect.5 E The will may be revoked by asking the court to revoke the will using the same procedure as in obtaining the declaration of validity, or it may be revoked by any method permitted under R.C. § 2107.33.6 E The will declared valid may only be modiŽed by codicil if the codicil is declared valid by the same procedure as the will.7 E A will that has been declared valid, and has not been removed from the probate court’s pos- session, is not subject to a post-death will contest, unless the party contesting it was required to be a defendant in the pre-mortem validity proceeding, and was not named or properly served.8 Why Change the Current Law? There are at least two reasons to change the current law. First, Ohio’s pre-mortem statute was passed in 1979 when a will was the primary instrument to dispose of one’s assets at death. Estate planning has evolved and the inter vivos or living trust is now commonly used in estate plans. The evolution of estate planning makes this change necessary. Second, the proposal is necessary if the principle underlying the 1979 law is still important. That principle is the belief that a testator, if he or she chooses, should be permitted to participate in a proceeding in which the testator’s will is chal- lenged, and that the testator’s participation makes for a better determination as to the issues of capa- city and undue inuence. Without the testator/settlor present when these issues are determined, we are left with the “worst evidence rule,” a phrase coined by professor John Langbien who said: “Our probate procedure follows a ‘worst evidence’ rule. We insist that the testator be dead before we investigate the question whether he had capacity when he was alive.”9 Issues of capa- city and undue inuence are best resolved when the testator or settlor is alive and part of the proceeding. Other States. The pre-mortem procedure is a declaratory judgment action, but a declaratory judgment action to determine the validity of one’s will or trust before death requires speciŽc statutory authorization beyond the state’s version of the Uniform Declaratory Judgment Act. This appears to be contrary to the language in the uniform act. For instance, Ohio’s version, at R.C. § 2721.03, states in pertinent part, “any person interested under a. . .will, written contract, or other writing constituting a contract. . .may have determined any question of. . .validity arising under the instrument. . .and obtain a declaration of rights, status, or other legal relations under it.” Notwithstanding this language, the courts have consistently held that, absent a statute expressly conferring such jurisdiction, they have no jurisdic- tion because the controversy is not ripe, in that the will can be changed, the assets may be depleted, and the actual heirs at law are not known until the testator dies.10 The following states have adopted statutes expressly authorizing pre-mortem actions to deter- mine the validity of trusts and/or wills: E Alaska—Wills and Trusts (adopted in 2010)11 E Arkansas—Wills (adopted 1979)12 E Delaware—Wills (adopted in 2000)13 and Trusts (adopted in 2015)14 E Nevada—Wills and Trusts (adopted in 2009)15 E North Dakota—Wills (adopted 1977)16 E North Carolina—Wills (adopted 2015)17 E Ohio—Wills (adopted 1979)18 The details of the pre-mortem procedures vary from state to state. However, all of the states provide for a “contest model” and all, except Dela- PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 192 K 2016 Thomson Reuters
- 15. ware, adopted a“Žling statute.” This means the grantor or settlor must Žle a complaint in the ap- propriate court, certain necessary parties are given notice of the Žling, and those receiving notice have the right to challenge the document in an adver- sarial proceeding in open court. Delaware, alone among the states, has a “notice statute.” It does not require the testator or settlor to Žle a complaint. It allows a testator or settlor to give written notice of the existence of the will (with a copy of the will) or existence of the trust (and no- tice as to whether that person is a beneŽciary under the trust) to anyone the testator or settlor chooses. If the person receiving notice does not Žle an action to contest the will or trust within 120 days after receipt of notice, that person is barred from later doing so. Those not given notice are not barred from later contesting the will or trust. Is the Current Ohio Pre-Mortem Statute Used? The pre-mortem statute is used, but not widely. In March 2011, Ohio attorneys who were members of the American College of Trust and Estate Counsel and/or were OSBA certiŽed special- ists in estate planning, trust and probate law, were surveyed and asked if they have used this statute and whether they think it is useful.19 Of the 218 attorneys contacted, 103, or 47%, responded. Twenty-eight said they had used the procedure, in some cases more than once, for a total of 46 times. In addition, 63 felt the procedure was a useful means of avoiding probate, 17 felt it was not useful, and 9 indicated they were uncertain. The reasons for not using the statute included: a) if a client wants to change a will that is declared valid, they must go through the same procedure again, and b) the procedure applies only to wills, not trusts, which are now the primary estate plan- ning document. The EPTPL Section’s proposal ad- dresses these concerns. Summary of Proposal. The EPTPL Section’s proposal contains 14 sections, each of which is discussed below. General DeŽnitions. A few terms that are used in the proposal require deŽnitions. “BeneŽciary under a will” means “any person designated in a will to receive a testamentary dis- position of real or personal property.” This is the same language used in R.C. § 2107.73(A) which names the necessary parties to a post-death will contest. However, the proposal’s deŽnition also includes a person who holds a power of appoint- ment over estate assets, but excludes “the class of permitted appointees.” “BeneŽciary under a trust” means any person who has a present or future beneŽcial interest in a trust, whether vested or contingent, and includes one who has a power of appointment over trust property. This is the same deŽnition of “beneŽciary” as under the Ohio Trust Code, at R.C. § 5801.01(C). However, unlike the latter, the proposal’s deŽnition expressly excludes “the class of permitted appointees.” For instance, if a settlor in the trust grants his son a “testamentary general power of appointment” over trust property, the son could, at his death, ap- point or direct those assets to any person or organi- zation he chooses. Under the proposal deŽnition, the son is a beneŽciary under the trust, and would be required to be named as a defendant. However, the class of appointees (any person or organization in the world) is not a required defendant. “Court” is the probate court of the county in which the complaint is Žled. “Related will” and “related trust” are deŽned because if a complaint is Žled to determine the va- lidity of a trust, the settlor must also Žle a com- plaint to determine the validity of a “related will.” Likewise, if a complaint is Žled to determine the validity of a will, the testator must also Žle a com- plaint to determine the validity of a “related trust.” The reasons for this requirement are explained below; however, the will and trust are related if the testator and settlor are the same person, and if the will names the trust as a beneŽciary. The term “trust” means an inter vivos revocable or irrevocable trust which, at the time the com- plaint is Žled, either a) the settlor resides in, or is domiciled in Ohio, or b) the trust’s principal place of administration is in Ohio. The term excludes oral trusts which are recognized as valid under the PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 193K 2016 Thomson Reuters
- 16. Ohio Trust Code,at R.C. § 5804.07, if proved by clear and convincing evidence. Establishment of Will Validity Before Death. This section authorizes a testator to Žle a complaint to determine the validity of the testator’s will before the testator’s death. This right is personal to the testator and may not be exercised by the testator’s guardian or an agent under a durable power of attorney. There is an unresolved issue under the current pre-mortem statute. It is illustrated by assuming the following facts: Client executes a will and an inter vivos trust. The will provides that the residu- ary estate is “poured over” to the trust, and includes language incorporating the trust as part of the will if the trust is determined to be invalid. Testator, under the current pre-mortem statute, obtains a declaration that the will is valid. Testator dies and the will is admitted to probate court. Later, a disgruntled heir (who had no knowledge of what was in the trust) who failed to challenge the will in the pre-mortem proceeding Žles an action challeng- ing the validity of the trust. Under these facts, is it possible for the heir to successfully challenge the trust? A good argument could be made that the answer is “no.” If the trust were determined to be invalid, it simply becomes part of the will, which already has been determined to be valid, and cannot be challenged. There is authority for this position. In Hageman v. Cleveland Trust Co., 45 Ohio St. 2d 178 (1976). Decedent’s will contained a pour over provision to an inter vivos trust. The disgruntled sole heir unsuccessfully challenged the will. A year later he challenged the trust on the basis that it had contained no corpus when it was established, a requirement at that time. The Ohio Supreme Court found that even if the trust was invalid, the trust was incorporated by reference and made a part of the will, which had been found to be valid in the prior will contest. In short, the heir’s only way to challenge a trust that is incorporated into a will by reference is through a will contest and, if the will has previously been determined to be valid, there is no remedy. Surprisingly, in Hageman, the trust contained no incorporation by reference language, and the trust was not deposited with the probate court within 30 days after the will was admitted to probate, both of which appear to be requirements under R.C. § 2107.05. See, Hayes Memorial United Methodist Church v. Artz, 2011-Ohio-3847, in which the court found that a beneŽciary of a trust named in the will was not a necessary party under Ohio’s pre-mortem statute and, therefore, could not bring a post-death will contest. The court found that the neither the trust, nor the trust beneŽciary, was a beneŽciary of the will, at least in part, because the trust was not incorporated by reference and made part of the will since the trust had not been deposited with the probate court within the 30 days, as required by R.C. § 2107.05. The proposal resolves this issue by requiring a testator who Žles a complaint to determine the va- lidity of the will to also Žle for a validity determi- nation as to the “related trust.” It would be unfair, and perhaps subject to a constitutional challenge, if one could protect a trust by obtaining a determina- tion that a “pour over will” is valid, without giving the defendants notice of the dispositive provisions in the trust, or any ability to challenge the trust. Ohio law provides that the physician-patient privilege is waived in a post-death will contest if the communication is relevant to the issues.20 There is no similar provision for a pre-mortem proceeding. The proposal changes this by requiring the testator who Žles a complaint to waive the testator’s physician-patient privilege. This allows those chal- lenging the will access, as they would have in a post-death contest, to medical information that may relate to capacity or susceptibility to undue inuence. Ohio law also waives the attorney-client privi- lege in a post-death will contest. Although there was discussion about also requiring a similar waiver in the pre-mortem proceeding, the EPTPL Section did not feel this was warranted, at least in part, because the testator is alive and a participant in the proceeding. Establishment of Trust Validity Before Death. This section authorizes a settlor to Žle a complaint to determine the validity of the settlor’s trust before the settlor’s death. PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 194 K 2016 Thomson Reuters
- 17. This section mirrorsthe previous section relat- ing to wills, in that the right to Žle a complaint is personal to the settlor, the settlor must waive the physician-patient privilege, and if there is a “re- lated will,” the settlor must Žle a validity determi- nation for both the will and trust. Jurisdiction and Venue. The testator or set- tlor must Žle the complaint with the probate court. However, the probate judge has the discretion, upon the motion of a party or the judge’s own mo- tion, to transfer the proceeding to the general divi- sion of the common pleas court. The ability to transfer was added because, in some instances, the probate judge may feel the general division is bet- ter equipped to handle a contested proceeding involving a trial. The venue for a testator’s complaint is the county of the testator’s domicile and, if not domiciled in this state, the county in which the testator’s real or personal property is located and, if none, the probate court of any county in this state. The venue for a settlor’s complaint is the county in which the settlor resides or is domiciled and, if neither apply, the county in which is located the trust’s principal place of administration. Contents of Complaint for Will Validity. The testator’s complaint must name as party defendants the testator’s spouse, the testator’s children, the testator’s heirs who would take if the testator died intestate, beneŽciaries under the testator’s will, and any beneŽciary under the testator’s most recent prior will. The current Ohio pre-mortem statute does not require the testator to name the beneŽciary under the testator’s most recent prior will. The testator may name, as a party defendant, any other person the testator believes may have a pecuniary interest in the determination of the va- lidity of testator’s will. This reminds the testator to consider naming as a defendant one who is not a required defendant, but who might, if not named, have a right to bring a post-death will contest. Sec- tion 2107.71 of the Revised Code permits any “person interested in the will” to contest that will. Ohio courts have deŽned this phrase to mean a person who has a pecuniary interest in the testa- tor’s estate. This might, for instance, include some- one granted an option in the will to purchase a farm at a price below its appraised value.21 The proposal also provides a list of 11 statements that may be included in the complaint. This diers from the current pre-mortem statute which simply says the complaint “may be Žled in the form determined by the probate court of the county in which it is Žled.”22 This change is intended to provide some guidance to the testator’s attorney and make the statute more user-friendly. Contents of Complaint for Trust Validity. This section applies to a complaint Žled by the set- tlor and mirrors the prior section dealing with wills. The required defendants are: the settlor’s spouse, the settlor’s children, the settlor’s heirs who would take if the settlor died intestate, the trustees, bene- Žciaries under the settlor’s trust, and, if the trust amends, or amends and restates, or replaces a prior trust, any beneŽciary under the most recent prior trust. As with a will complaint, the settlor may name any other party the settlor believes may have a pecuniary interest in the determination of the va- lidity of the trust. As with the will complaint, this section includes a list of statements that may be included in se- ttlor’s complaint, to provide the settlor’s attorney guidance and make it easier to use this procedure. Service of Process. Service of process of the complaint and will, or complaint and trust, or com- plaint and will and trust, must be made on every party defendant as provided in the applicable rules of civil procedure. Hearing. The court must schedule a hearing on the complaint, whether contested or not. Notice of the hearing must be given to the testator or settlor and all party defendants as provided in the ap- plicable rules of civil procedure. The hearing is adversarial in nature. Burden of Proof. The testator or settlor has the burden to establish prima facie proof of the ex- ecution of the will or trust. The person opposing the complaint has the PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 195K 2016 Thomson Reuters
- 18. burden to establishone or more of the following: lack of testamentary intent, lack of capacity, undue inuence, fraud, duress, mistake, or revocation. The party who has the initial burden of persua- sion has the ultimate burden of persuasion as to those matters. Declaration by Court. If the will is declared valid then, after the death of the testator, unless the will is modiŽed or revoked after the declara- tion, it shall be admitted to probate. If the trust is declared valid, and unless the trust is modiŽed or revoked after the declaration, the trust has full legal eect. Binding Eect of Declaration. After the testator’s death, the only person who may contest a will or trust that has been declared valid, is a person who should have been named in the pre- mortem proceeding and that person was either not named or was not properly served. The failure to name a party defendant is not jurisdictional. The failure of the testator or settlor to name a necessary party does not open the door and allow a party that was named and properly served to attack the will or trust. This section applies the virtual representation rules of Chapter 5803 of the Revised Code to the pre-mortem proceeding. Chapter 5803 of the Re- vised Code speciŽes persons who may represent others in judicial proceedings and certain other matters. Generally, in the absence of a conict of interest, (a) the holder of a general testamentary power of appointment may represent the interests of permissible appointees and takers in default, (b) Žduciaries may represent those to whom they owe Žduciary duties, (c) parents may represent minor or unborn children, and (d) a person with a substan- tially identical interest may represent a minor, in- capacitated, or unborn individual, or a person who cannot be located. This section makes it clear that the virtual rep- resentation rules are applied at the time of the pre- mortem proceeding and not at the death of the testator or settlor. It is sucient if the representa- tive falls within the virtual representation statute at the time the pre-mortem complaint is Žled, even if that is not the case when the testator or settlor dies. Change to Will after Declaration. This sec- tion changes current law by allowing a testator to amend a will by a codicil that is not declared valid as was the will. However, the codicil is not protected by the will declaration, but the balance of the will, not aected by the amendment, remains protected by the earlier declaration. If a will declared valid is later amended or revoked, and that later amendment or revocation is determined to be invalid, the declaration of valid- ity, as to the original will, is binding. Change to Trust after Declaration. A trust declared valid may later be modiŽed, terminated or revoked. If a trust declared valid is later revoked by a new trust or other document, and the later trust or other revocation is determined to be invalid, the declaration of validity, as to the original trust, remains binding. If a trust declared valid is later amended, the amendment is not protected by the earlier declara- tion, unless the settlor obtains a declaration of va- lidity as to the amendment. The balance of the trust, not aected by the amendment, remains protected by the earlier declaration. ConŽdentiality. This section provides that the Žndings of fact in a pre-mortem proceeding is not admissible as evidence in any proceeding other than one brought to determine the validity of a will or trust. The judgment in the pre-mortem proceed- ing is not binding in any action not brought to determine the validity of a will or trust. Conclusion. Most estate planners have encoun- tered situations in which the client’s wishes involve an unusual disposition. The planner believes the client to be competent and not unduly inuenced. Nevertheless, there will be disgruntled heirs who may want to challenge the will or trust, and engage the estate in lengthy, costly litigation. The planner has discussed with the client alternative plans and informed the client of the potential for litigation. PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 196 K 2016 Thomson Reuters
- 19. The client remainsŽrm and knows what he or she wants. In such a situation, the estate planner has a duty to help the client protect the client’s plan. While there are other methods of protecting a client’s plan that should be considered Žrst, the pre-mortem declaratory judgment alternative is one that should be available and mentioned to the client in the right situation.23 ENDNOTES: 1R.C. § 2107.081. 2R.C. § 2107.081(A). 3R.C. § 2107.083. 4R.C. § 2107.084(A). 5 R.C. § 2107.084(B). 6 R.C. § 2107.084(C) and R.C. § 2107.084(D). 7R.C. § 2107.084(D). What is the result if a will declared valid is modiŽed by a codicil for which no pre-mortem validity determination is made? It seems to the author there are several possible interpretations. First, the will remains valid and the codicil is void. Second, the will remains valid, and the codicil may be probated with the will, but only the will has the protection of the pre-mortem decision. Third, both the will and codicil are void. 8R.C. § 2107.084(E) and R.C. § 2107.71(B). 9Langbien, Undue Inuence: The Epic Battle for the Johnson and Johnson Fortune, 103 Yale L. J. 2039-2048, 2044 (1994). 10 See, Cowan, et al. v. Cowan, et al., 254 S.W. 2d 862 (Tex. Civ. App.—Amarillo 1952) which refers to similar cases in Michigan and Alabama. 11AS §§ 13.12.530—13.12.590. 12A.R.S. §§ 28-40-201—28-40-203. 1312 Del. § 1311. 1412 Del.C. § 3546. 15 Nev. Rev. Stat. § 30.040. 16 N.D.C.C. §§ 30.1-08.1-01—30.1-08.1-04. 17N.C.G.S. §§ 28A-2B-1—28A-2B-6. 18R.C. §§ 2107.081—2107.085. 19 Ralph Lehman, Determining the Validity of Wills and Trusts—Before Death, Probate Law Journal of Ohio, July-August, 2011, at 247. 20R.C. § 2317.02(B)(1)(e). 21 See, John J. Geiger v. Paul E. Geiger, Executor of the Estate of Elizabeth R. Steinberger, 81-LW- 2563 (1981), where the court found that, for pur- poses of a post-death will contest, the optionee under an option to purchase a farm at below fair market value had a direct pecuniary interest in the estate, and was a required defendant in the will contest as “other interested parties.” 22 R.C. § 2107.081(A). 23 Including a strong “no-contest” provision in the will or trust is another way of protecting a client’s plan, but is only eective if the person who is likely to object is given enough under the plan to discourage a contest. An interesting question is whether the “no contest” provision would apply in a pre-death challenge. The author believes it would. Some believe that a video tape of the will and trust execution will provide strong evidence, but, unless done routinely, it may also be seen as a strong indication that the attorney had questions about the validity of the plan. In the author’s experience, one of the best ways to prevent a post-death challenge, in the family sit- uation, where one or more children will receive a disproportionate share, is to have the parents dis- close the plan to the children, and explain the reasons for the unequal treatment. In the author’s opinion, one of the situations in which the pre-mortem proceeding is useful is where the client wants to pass ownership of a farm or other business to the child who is the successor, and the client believes this cannot be done if the children are treated equally. In such a situation, especially if the client’s relationship with the child most likely to challenge the plan is already bad and, unfortunately, in the client’s view cannot be repaired, the pre-mortem proceeding may avoid a challenge altogether, or if challenged in the pre- mortem proceeding, at least the client can partici- pate to counter charges of incapacity or undue inuence. In such a situation, in the author’s opinion, the best protection is seek a pre-mortem declaration that the will and trust are valid and, if the disgruntled heir is given a signiŽcant amount, albeit less than the business successor, to include in the documents a strong no contest provision which the author believes would be applicable to a challenge in the pre-mortem proceeding. OHIO’S ANTI-LAPSE STATUTE AND THE PROPOSED STATUTORY RESPONSE TO CASTILLO V. OTT By Brian Layman, Esq. Layman, D’Atri & Associates Canton, Ohio Chairman, EPTPL Section Committee on Antilapse Statute As a general rule, ORC Section 2107.52 provides that when a Will makes a gift to a class and a member of the class predeceases the testator that a substitute gift will be made to the descendants of PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 197K 2016 Thomson Reuters
- 20. the deceased classmember. Section 2107.52(B)(2)(b) provides an exception to the general rule when the class is deŽned as “issue,” “descendants,” “heirs of the body,” “heirs,” “next of kin,” “relatives,” or “fam- ily,” or a “class described by language of similar import.” In Castillo v. Ott, 2015-Ohio-905 (6th Dist.), the court determined that “children” was a class described by language of similar import which prevented a substitute gift for the deceased child’s descendants. The Castillo case involved a will leaving the estate to decedent’s “children, share and share alike.” One child predeceased the testator, leaving children. The Court was forced to choose between making distribution all to the surviving children or a share also to the children of the deceased child. There were no words of survivorship. The Court analyzed the anti-lapse statute as provided in Sec- tion 2107.52. The court held that the language “or a class described by language of similar import,” includes a class gift to children. As a result, there was no substitutionary gift and the children of the deceased child did not take. The Castillo decision is contrary to the policy of Ohio’s anti-lapse statute and com- ments to the Uniform Probate Code, upon which the statue is based, because each of the other classes described in Section 2107.52(B)(2)(b) are multi-generational. A gift to “children,” by contrast, is a gift to a single generation class. The problematic language in 2107.52(B)(2)(b) was taken from the UPC (see 2-603(b)(2) [and 2-707(b)(2)]). The UPC comments distinguish a multi-generation and a single generation class gift. Below is the comment to 2-603: Class Gifts. In line with modern policy, subsection (b)(2) continues the pre-1990 Code’s approach of expressly extending the antilapse protection to class gifts. Subsection (b)(2) applies to single-generation class gifts (see Restatement (Third) of Property: Wills and Other Donative Transfers §§ 14.1, 14.2 (2008)) in which one or more class members fail to survive the testator (by 120 hours) leaving descen- dants who survive the testator (by 120 hours); in or- der for the subsection to apply, it is not necessary that any of the class members survive the testator (by 120 hours). Multiple-generation class gifts, i.e., class gifts to “issue,” “descendants,” “heirs of the body,” “heirs,” “next of kin,” “relatives,” “family,” or a class described by language of similar import are excluded, however, because antilapse protection is unnecessary in class gifts of these types. They al- ready contain within themselves the idea of repre- sentation, under which a deceased class member’s descendants are substituted for him or her. See Sec- tions 2-708, 2-709, 2-711; Restatement (Third) of Property: Wills and Other Donative Transfers §§ 14.3, 14.4 (2008). The Ohio statute would be made clear by reference to the UPC Comment, but the Castillo Court did not mention the Comment and probably did not have it. Ohio does not incorporate uniform law com- ments, and courts tend to read our statutes without them. The Anti-Lapse Committee1 and Section Council proposed to clarify that the exception to the anti-lapse protection applicable to Wills only applies to gifts to multi-generational classes by add- ing the following underscored language: (b) If the devise is in the form of a class gift, other than a devise to “issue,” “descendants,” “heirs of the body,” “heirs,” “next of kin,” “relatives” or “family,” or a class described by language of similar import that includes more than one generation, a substitute gift is created in the surviving descendants of any deceased devisee. The same statutory language exists in Ohio Trust Code Section 5808.19(B)(1)(b)(ii). To maintain con- sistency regarding the interpretation of wills and trusts, the Anti-Lapse Committee and Section Council proposed to clarify that the exception to the anti-lapse protection applicable to Trusts only applies to gifts to multi-generational classes by add- ing the following underscored language: (ii) If the future interest is in the form of a class gift, other than a future interest to “issue,” “descendants,” “heirs of the body,” “heirs,” “next of kin,” “relatives,” or “family,” or a class described by language of simi- lar import that includes more than one generation, a substitute gift is created in the surviving descen- dants of the deceased beneŽciary or beneŽciaries. Both of the proposed statutory clariŽcations have been passed by the Screening Committee and by the Council of Delegates. The clariŽcations are now ready for a legislative sponsor. ENDNOTES: 1The Committee consists of Robert Brucken, PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 198 K 2016 Thomson Reuters
- 21. Steve Dauterman, AdamFried, Patricia Pacenta, Susan Racey, and Daniel Ramer. In addition, the Committee would like to thank John Clark and Prof. Alan Newman for their input. SUPERINTENDENCE RULE 66 AND ITS IMPACT ON YOUR GUARDIANSHIP PRACTICE By Colleen B. Laux, Esq. Vorys, Sater, Seymour & Pease LLP Cincinnati, OH OSBA CertiŽed Specialist, Estate Planning, Trust & Probate Law Based on a CLE presentation given by the author at the OSBA All-Ohio Legal Forum on April 29, 2016. BACKGROUND TO ENACTMENT Superintendence Rule 66 was adopted on March 1, 2015 and became eective on June 1, 2015, enacting numerous changes to the handling of guardianships in Ohio. While issues related to guardianship reform have been studied for the past several years, it was the May 2014 Columbus Dispatch series, Unguarded,1 which brought the is- sue statewide attention. Many of the new rules enacted are a direct response to the problems and abuses highlighted by the series. The new rules are based on The National Guard- ianship Association’s “Standards of Practice for Guardianships” which seek to protect adult wards by advancing consistent and clear national stan- dards for all guardians.2 The rules seek to standardize practices through- out the state by establishing minimum standards and responsibilities of both the local probate courts and the guardians appointed by the courts. The rules cover a wide range of topics designed to protect and ensure that the best interests of adult wards are met. The goals of the new rules, among other things, are to create “people-centered” planning for wards, emphasize having more educated and knowledge- able guardians, and impose a more active role on the courts to ensure that the guardians they ap- point are serving the needs of their wards.3 Guard- ians are encouraged to foster positive relationships with their wards, to have ongoing communications with their wards, to monitor and coordinate ben- eŽts, and where appropriate, to always look for the least restrictive alternative to a guardianship. TO WHOM DO THE NEW RULES APPLY: SUP. R. 66.02 The new rules only apply to adult guardianships where the probate court has appointed a legal guardian of the person and/or estate of a ward. They apply to both individuals and employees of a corporation, such as a bank, who have been ap- pointed as guardian. The courts, however, may exempt guardians re- lated by consanguinity or anity from the rules. It is highly suggested that the practitioner review their court’s local rules and to familiarize them- selves with their particular county’s application of many of these new rules. NEW EDUCATION REQUIREMENTS FOR GUARDIANS: SUP. R. 66.06 AND 66.07 As noted, one of the goals of the new guardian- ship rules is an emphasis on having educated and knowledgeable guardians. To this end, the rules created two new educational requirements for guardians: pre-appointment training and continu- ing education. The rules require that all new guardians, either prior to their appointment, or within six months of their appointment, must attend a six hour course regarding the fundamentals of guardianship.4 In addition, all existing guardians (those who had been appointed prior to June 1, 2015) are required to take the six hours fundamental course by June 1, 2016.5 The fundamentals course is required to include, at a minimum, education on the following topics: E Establishment of the guardianship E The ongoing duties and responsibilities of a guardian E Record keeping and reporting duties of a guardian PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 199K 2016 Thomson Reuters
- 22. E Any othertopic that concerns improving the quality of life of a ward These classes have been developed and are being oered through the Ohio Supreme Court. They can be attended in person, via a live course or a video replay at sites across the state, or online. The class is free, but pre-registration is required. In addition, classes marked as “Professional” will earn free CLE or CEU credits for attendees. Information regard- ing the classes can be found at: https://www.supre mecourt.ohio.gov/Boards/judCollege/adultGuardian ship/fundamentals.asp. In addition to the initial six hours fundamentals class, guardians will also be required to take a three hour continuing education class each year.6 The Ohio Supreme Court is currently developing these continuing education classes. A guardian is required to provide documentation to the court on or before January 1 of each year certifying that they are in compliance with the ongoing educational requirements.7 While the rules do not impose any penalty for a guardian’s failure to fulŽll the initial fundamentals training requirement, should they fail to comply with the continuing education requirement, they are not eligible for appointment as guardian in any future guardianship matter until the educational requirements have been completed.8 Missing from the rules is the ability of the local probate court to remove a guardian solely due to their failure to satisfy any of the educational requirements. CRIMINAL BACKGROUND CHECKS: SUP. R. 66.05 Local probate courts are now required to conduct criminal background checks on all applicants for appointment of guardian, prior to the establish- ment of the guardianship. The rules, do not, however, specify any speciŽcs on how the back- ground checks are to be conducted, thus they seem to vary from county to county. For example, in Clermont County, an applicant is required to be Žngerprinted;9 Franklin County requires a formal BCI background check, which the applicant must initiate,10 while Hamilton County performs a background check by running the applicant’s name through a criminal database. Further, a recent survey of the counties across the state revealed that many counties were already conducting some sort of background checks of applicants prior to the enactment of the new rules. It is also signiŽcant to note, that nothing in the rules speciŽcally prohibits an applicant with a criminal background from be- ing appointed as a guardian. Absent from the issue of background checks is how to pay for them. SpeciŽcally, in the counties where an outside agency is conducting the checks, there does not appear to be a mechanism to cover the costs of the checks for indigent guardianships. For example, in Clermont County, an applicant is required to pay the Sherri directly for the costs of Žngerprinting. When surveying the counties in Ohio, one county representative responded that they were still trying to Žnd an aordable way to implement this new requirement since the local probate court does not have the funds to conduct the checks and a large percentage of their guardian- ship cases are indigents. Finally, it should be noted that an attorney ap- plying to be appointed as guardian may be ex- empted from the requirement of a formal criminal background check if they Žle a certiŽcate of good standing with the court.11 ANNUAL PLANS: SUP. R. 66.08 In addition to the current Guardian’s Report12 and Guardianship Accounts,13 required by statute, the new rules now require that each year, guard- ians prepare and Žle an annual plan which sets for the guardian’s goals for meeting the ward’s personal and Žnancial needs. Currently there is no standard probate form for the annual plan, however the Supreme Court has circulated a proposed form which several counties are currently using. Many other counties have developed their own speciŽc forms to meet the annual plan requirement. An informal review of many of the pleadings be- ing used throughout the counties shows that the lo- cal probate courts are seeking more detailed infor- mation concerning the ward’s medical and other care providers, including anticipated changes to any providers, information concerning the ward’s PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 200 K 2016 Thomson Reuters
- 23. employment, social, andrecreational activities; more detailed information concerning the ward’s Žnancial recourses, including those which are not necessarily part of the guardianship estate; as well as the guardian’s goals for the ward during the coming year. NEW RULES AND RESPONSIBILITIES FOR GUARDIANS: SUP. R. 66.08 AND 66.09 Guardian have always had certain legal respon- sibilities to the courts and to their wards, including following orders of the probate court, protecting the person and interests of the ward, and fulŽlling their Žduciary responsibilities.14 Once a guardian has been appointed, several new duties and responsi- bilities attach. Sadly, most of these “new” rules should be common sense and already standard practice. Instead, the Supreme Court found it nec- essary to essentially codify these best practices in order to ensure that guardians are fully meeting the needs of their wards. Rule 66.08 sets forth the general responsibilities of a guardian, which include: E All guardians are required to obey all orders of the probate court, including following local rules and applicable state and federal laws.15 This rule seems to be a natural extension of the guardian’s existing statutory duty to obey all orders of the probate court, who is the superior guardian of wards subject to their jurisdiction.16 E An applicant seeking appointment as guard- ian must meet with the proposed ward at least once prior to the hearing on the appointment of a guardian.17 E Guardians become mandatory reporters and must immediately report allegations of abuse, neglect, or exploitation of the ward to the probate court, and if applicable to Adult Protective Services.18 E Guardians are to always look for the least re- strictive alternative to a full guardianship and to limit or terminate an existing guardianship if the ward no longer needs a guardian.19 E The guardian is required to inform the court when their ward has died.20 E Guardians are required to keep the court ap- praised of changes to the ward’s residence and the reason for the change. If the change is to a more restrictive setting, prior court approval is needed unless a delay in getting the ap- proval would adversely aect the health and safety of the ward.21 E Guardians are required to seek prior court ap- proval before Žling any lawsuit on behalf of their ward.22 E Guardians with 10 or more wards must regis- ter with probate court and provide a fee sched- ule that outlines both fees for guardianship services, as well as legal or other direct services.23 E Guardians are to terminate the guardianship of an estate if the ward’s principal income is derived from governmental entities (i.e. Social Security, VA) when a payee has been ap- pointed by the governmental entity and no other signiŽcant assets or income exists.24 E Guardians are required to report both the payor and the source of any outside fees they receive for their guardianship services- they cannot accept compensation or incentives from direct service providers.25 E Guardians are to avoid conicts of interest with their ward.26 E When the Guardian’s Inventory is Žled with the court, the guardian also needs to provide the court with an itemization and the location of ‘important papers’ of the ward such as wills, trusts, powers of attorney, and advanced directives.27 Rule 66.09 enumerates additional, more speciŽc, responsibilities that a guardian owes to their ward, including: E Guardians are to act professionally and with integrity.28 E Guardians are to exercise due diligence to PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 201K 2016 Thomson Reuters
- 24. make decisions thatare in their ward’s best interests.29 E When making decisions concerning the needs of a ward, the guardian should impose the least limitations appropriate on the ward’s rights, freedom, or ability to control their environment.30 E Guardians are to advocate for services focused on their ward’s wishes and needs, striving to balance the ward’s independence with their best interests.31 E Guardians are to foster and preserve positive relationships in the ward’s life.32 The guard- ian should not be cutting the ward o from family and friends merely due to the ward be- ing under a judicial guardianship. E A guardian should strive to understand and know their ward’s preferences and beliefs by meeting with the ward, as needed, but at least once per quarter, communicating privately with the ward, assessing their ward’s physical and mental conditions and limitations, ap- propriate living conditions, the ward’s needs for additional services, and to notify the court if the level of care being provided to the ward is inadequate.33 E A guardian is required to monitor and coordi- nate services and beneŽts provided to the ward, by having regular contact with the ward’s service providers, assessing their cur- rent services, considering potential additional services, and maintaining the ward’s eligibil- ity requirements for all of their services.34 E A guardian should seek appropriate advice regarding extraordinary medical issues and, if possible, to honor the ward’s preferences and belief systems.35 As an extension of this, the guardian is required to make an eort to ascertain their ward’s preferences regarding end of life decisions.36 E The guardian is required to maintain the conŽdentiality of their ward’s Žnances, except as required to be disclosed to the court via the statutory court accountings.37 FORMAL COMPLAINT PROCESS: SUP. R. 66.03 One of the issues highlighted in the Columbus Dispatch series was the frustration of wards and their families concerning an inability to air their complaints regarding the guardian and/or his ac- tions to the court. Now, any interested party, including the ward, may formally ask the court to review the actions of a guardian. The new rules direct the local probate courts to adopt a formal complaint process regarding the performance of guardians appointed by the court. As part of the formal complaint process, the court is required to have a designated person receive and consider all complaints that have been Žled.38 The court is required to provide the guardian with a copy of the complaint39 and after the court has given prompt consideration of the complaint, to notify the person who originally Žled the complaint as to the disposition of the same.40 If necessary and/or appropriate, the court can hold a status conference to consider the issues that were raised in the complaint. The court, as the superior guard- ian, has the power to issue instructions to the guardian to correct issues or they may remove guardians if warranted by the circumstances. CONFLICTS OF INTEREST WITH DIRECT SERVICE PROVIDERS: SUP. R. 66.04, 66.08, AND 66.09 The new rules seek to avoid potential conicts of interest that may arise between a guardian who may also provide direct services to their ward. Direct Services are deŽned as “services typically provided by home and community-based care and institutionally-based care providers, including medical and nursing care, care or case manage- ment services, care coordination, speech therapy, occupational therapy, physical therapy, psychologi- cal services, counseling, residential, legal represen- tation, job training, and any other similar services.”41 Examples of direct service providers are nursing homes, nurses, home-health aides, and other caregiving personnel. Attorneys are also direct service providers and subject to new restrictions. A direct service provider is speciŽcally prohibited PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 202 K 2016 Thomson Reuters
- 25. from serving asguardian, unless otherwise autho- rized by law.42 Thus neither a nursing home, nor an employee of the facility, may serve as guardian for one of their residents. The rules assume that it is otherwise impossible for a service provider to impartially advocate for their ward if a problem, such as a care concern or billing issue would arise. It would also seem that if an attorney is already providing legal services to a potential ward, that they are not eligible to be appointed to serve as guardian for their client. Direct service providers cannot pay compensa- tion or an incentive to a guardian for serving as guardian.43 In the past, some nursing homes would pay a monthly stipend or other compensation to outside guardians for serving residents in the facility. This practice is now prohibited. Guardians are cautioned to avoid all actual or apparent conicts of interest regarding a ward’s personal or business aairs. If the guardian has any doubt regarding a potential conict, they should report the perceived conict to the court for the court’s review and determination.44 Finally, guardians are prohibited from providing a direct service to the ward unless authorized by the court.45 Thus, if an attorney is currently serv- ing as guardian of a ward, they would be required to seek court approval prior to providing direct legal services to the ward. IMPLEMENTATION BY THE COUNTIES The purpose of these new rules is to have more knowledgeable and better educated guardians serv- ing the needs of their wards. At the same time, the Supreme Court has also attempted to increase the court’s involvement in the ongoing administration of guardianships within the state. Unfortunately, as experienced practitioners know, the implementa- tion and interpretation of Superintendence Rules, as well as statutes related to probate administra- tion, can vary greatly from county to county. These new rules are no dierent. SpeciŽcally Rule 66.02(A) permits the local courts to exempt family members from some, none, or all of these new rules. In the fall of 2015, a survey was sent to the probate courts of all 88 counties in Ohio. The courts were asked courts about their implementation of several of the new rules. As of September 1, 2015, respon- ses were received from 52 of the counties. Each county was asked whether or not they will be exempting guardians related to their wards by consanguinity or anity from the new require- ments related to pre-appointment background checks, the initial fundamentals class and subse- quent continuing education classes, and the annual care plans. Regarding the background checks, many coun- ties responded that they were already conducting background checks on some or all guardianship ap- plicants, even before the enactment of Rule 66. For new guardianships, 8 of the responding counties indicated that they were exempting family member applicants from the required background checks.46 The educational requirements were the areas with the most diverse responses from the counties. Overall 18 of the 52 responding counties either have a blanket exemption or liberal policies exempt- ing family members from both the fundamentals and the continuing education requirements.47 At least one county already had their own training classes that they required guardians to attend,48 while others are examining exemption of family members on a case by case basis, depending on a variety of factors.49 Only 8 of the responding counties are exempting family members serving as guardians from the requirement of preparing and Žling an annual care plan.50 BUT WHO WILL PAY FOR THESE NEW MANDATES? Upon the announcement of the adoption of Su- perintendence Rule 66, Julia R. Nack, a member of the drafting committee, stated that “[t]he Supreme Court Rules are a good step forward, as they move Ohio towards best practices in guardianship. While I would like to have seen training and visitation requirements that were as rigorous as the national standards envision, these new mandates are a very positive step.” She continued to say that “[i]t is important now for Ohio lawmakers to take up the issue of guardianship and provide the courts with PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 203K 2016 Thomson Reuters
- 26. the statutory andŽnancial support they need to make these changes eective.”51 This same senti- ment concerning the new burdens that are being imposed on the local probate courts was shared by the representative from Hardin County Probate Court, who in their reply to the recent survey stated, “All of the new extra requirements are go- ing to cost me most of my indigent guardians which are not willing to do all the extra work for no pay and the court doesn’t have the money for extra stang and expenses required. This is going to be a huge burden for small rural courts who, by and large, did not have the problems that were in Franklin County and which these changes were meant to address.” ENDNOTES: 1 Unguarded/A Dispatch Series, http://www.disp atch.com/content/topic/special-reports/2014/unguar ded.html, Columbus Dispatch. 2 Standards of Practice, Nat’l Guardianship As- soc. (2013), http://www.guardianship.org/document s/Standards of Practice.pdf. 3 Guardians of Adults Frequently Asked Ques- tions (FAQ), http://supremecourt.ohio.gov/Boards/ju dCollege/adultGuardianship/FAQ.asp#Q3, Supreme Ct. Ohio. 4 Sup. R. 66.06(A). 5Sup. R. 66.06(B). 6 Sup. R. 66.07(A). 7 Sup. R. 66.07(B). 8 Sup. R. 66.07(C). 9See, http://www.probatejuvenile.clermontcount yohio.gov/probate.aspx. 10See, http://www.probate.franklincountyohio. gov. 11Sup. R. 66.05(A)(1). 12R.C. 2111.49. 13R.C. 2109.30. 14 R.C. 2111 et. seq. 15Sup. R. 66.08(A). 16R.C. 2111.50(A)(1). 17 Sup. R. 66.08(B). 18 Sup. R. 66.08(C). 19Sup. R. 66.08(D). 20 Sup. R. 66.08(D)(4). 21 Sup. R. 66.08(E). 22 Sup. R. 66.08(F). 23 Sup. R. 66.08(H). 24 Sup. R. 66.08(I). 25Sup. R. 66.08(J). 26 Sup. R. 66.08(K). 27Sup. R. 66.08(L). 28 Sup. R. 66.09(A). 29 Sup. R. 66.09(B). 30Sup. R. 66.09(C). 31Sup. R. 66.09(D). 32Sup. R. 66.09(E). 33Sup. R. 66.09(F). 34Sup. R. 66.09(H). 35Sup. R. 66.09(I). 36 Sup. R. 66.09(J). 37Sup. R. 66.09(L). 38 Sup. R. 66.03(A)(1). 39 Sup. R. 66.03(A)(2). 40 Sup. R. 66.03(A)(3). 41Sup. R. 66.01(B). 42Sup. R. 66.04(D). 43 Sup. R. 66.08(J). 44 Sup. R. 66.09(G). 45Sup. R. 66.09(G). 46 Belmont, Champaign, Columbiana, Fulton, Henry, Holms, Morgan, and Vinton County Probate Courts. In addition, Licking County Probate is will- ing to consider exemptions for family members on a case by case basis. 47 Belmont, Champaign, Delaware, Fulton, Guernsey, Hamilton, Holmes, Jeerson, Logan, Lucas, Medina, Miami, Morgan, Seneca, Summit, Vinton, Warren, and Wayne County Probate Courts. 48Delaware County Probate Court currently has had its own training since 2013 and Guernsey County Probate Court is developing its own local training program for family members serving as guardians. 49See, e.g., Athens, Columbiana, Erie, Fulton, Hamilton, Hardin, Henry, Hocking, Licking, Lucas, Medina, Miami, Montgomery, Morgan, Ottawa, Vinton, and Wood County Probate Courts. 50 Belmont, Fulton, Guernsey, Hamilton, Hol- mes, Jeerson, Logan, and Morgan County Probate Courts. 51Ohio’s Guardianship Rules Overhauled, Beougher, Stephanie, Court News Ohio, March 10, 2015, http://www.courtnewsohio.gov/happening/ 2015/ruleAmendAdultGuardianhip 031015.asp. PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 204 K 2016 Thomson Reuters
- 27. CONFLICTS OF INTERESTIN ESTATE ADMINISTRATION By J. Michael Cooney, Esq. Dinsmore & Shohl LLP Cincinnati, Ohio Member, PLJO Editorial Advisory Board CINCINNATI BAR ASSOCIATION V. ROBERTSON For some time, there has been a debate regard- ing whether it is possible for an attorney who represents a Žduciary both in the person’s Žduciary capacity and in his or her individual capacity to have a conict of interest and uncertainty about who is the client in estate administration, the Ždu- ciary or “the estate.” A recent decision of the Ohio Supreme Court indicates that Ohio lawyers need to seriously worry about these issues. The case of Cincinnati Bar Association v. Robert- son (slip opinion No. 2016-Ohio-654) was decided on February 25, 2016. The attorney in the case had professional misconduct issues associated both with a collection and reporting of legal fees issue and in connection with a conict of interest issue. The is- sue of greatest importance for estate planning and estate administration attorneys in Ohio is the conict of interest issue. I suggest that the conict issue, and the Court’s approach to it, cannot be fully understood other than in light of the fee issue, discussed below. The facts in Robertson are summarized as follows: In the Robertson case, the attorney had repre- sented an individual on various matters during his lifetime. After the death of his client, one of the daughters of the decedent asked the attorney to represent her as the executor of the estate. Shortly after the daughter was appointed executor, other family members Žled objections to the daughter serving as executor, seeking her removal, and objec- tions to the inventory of the estate, seeking inclu- sion of some funds that had been transferred from the decedent to the executor’s husband during the decedent’s lifetime. The attorney, who represented the decedent during his life, believed that the claims of the family members were baseless and believed he could disprove them. The Board of Professional Conduct of the Supreme Court found “Respondent did not indicate to (executor) that the representation would create a conict of interest.” After a number of months, the family members withdrew their objections. The Board of Profes- sional Conduct noted that when the attorney was asked by the Žduciary to defend her from the al- legations made by other members of the family, “Respondent agreed, but did not seek any consent from any beneŽciary, nor obtain a separate fee agreement.” The Board viewed the attorney as representing the estate, owing duties to all beneŽ- ciaries, and not as merely representing the executor. The Board of Professional Conduct found that the attorney did not inform the executor that a conict was created between Respondent’s repre- sentation of the executor as Žduciary of the estate, and Respondent’s representation of her individu- ally and her husband as to the allegations that they had engaged in misconduct. The attorney “believed that the allegations were false and were intended to harass” the executor. The attorney did not divide his billing of the estate between “regular estate administration” and “defense of the executor from the family members’ claims.” The Hamilton County Ohio Probate Court has long had a local rule, Rule 71.1, with respect to at- torney fees in decedent’s estates. The Rule states that “the Court has the ultimate responsibility and authority to review attorney fees in decedent’s estates.” The Rule further provides that “attorney fees for the administration of a decedent’s probate estate ordinarily shall be paid at the time the Žd- uciary’s Žnal account or certiŽcate of termination is prepared for Žling with the Court, and such fees shall not be paid prior to two weeks before the Žl- ing of Žduciary’s Žnal account or certiŽcate of termination.” The Court may, upon application and for good cause shown, approve an application for partial payment of attorneys’ fees for various reasons, including that the estate is involved in protracted litigation. In the probate case underly- ing the Robertson matter, the issues between the PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 205K 2016 Thomson Reuters
- 28. family members werecontentious. The attorney for the Žduciary, six months after the application for the removal of the executor had been Žled, and shortly after the application was voluntarily withdrawn, Žled an application for partial payment of fees. The Court denied the interim fees at that point. Respondent then Žled an application for extraordinary fees. The Court reminded the parties that the Court would ultimately decide on fees, and the Court issued an order that the application for payment of fees would be held in abeyance until the estate was ready to be closed. Very shortly af- ter the Court order was issued, the attorney requested a personal payment of partial fees from the executor. There were a series of emails from the attorney to the executor, and a series of pay- ments from the executor to the attorney. Subse- quently, at the end of the administration, the Court awarded an attorney fee of $14,000, which was speciŽed to be the full amount of attorney fees from all sources approved for activities conducted on behalf of the estate. At this point, the executor had paid in excess of $23,000 in attorney’s fees. A Ždu- ciary account was Žled without reecting the earlier payments. The Žnal account reected the $14,000 attorney fee payment that the Court had approved, but did not reect the earlier personal payment by the executor. The executor Žled a grievance against the attorney, and the attorney reimbursed the amount in excess of $14,000 to the executor. The attorney was charged with, and stipulated to, the following violations: 1. Professional Conduct Rule 1.7(b) - Conict of Interest; 2. Professional Conduct Rule 3.4(c) - Knowingly Disobeying an Obligation Under the Rules of a Tribunal, by receiving fees not authorized by the Court as required by the local Rule; 3. Professional Conduct Rule 8.4(d) - Conduct Prejudicial to the Administration of Justice, by receiving fees that had not been authorized by the Court as required by the local Rule and Žling documentation with the Court that indicated he had not received any fees. It seems likely that the fee issue, including both the apparent violation of the local rule and the arguable lack of candor with the Court on the ac- counts, created the disciplinary problem. It is pos- sible that this disciplinary problem related to fees suggested that the prudent course was to stipulate to the conict of interest issue, as the attorney did. Absent that issue, it seems reasonable for the at- torney to assert that he had only a single client, the Žduciary, who had two roles, both individually as a person who had entered into a transaction with her father before his death, and as a Žduciary. While the Žduciary may have been in a conict in the two roles, there is at least a credible argument that the attorney can represent one individual without a conict. The stipulation on the conict is- sue left no clear analysis of this issue by the Board or the Court. Without an adequate debate on the merits of this position, the Supreme Court’s opinion in Robertson suggests that if a party seeks removal of the Ždu- ciary, the attorney for the Žduciary needs to seri- ously consider requiring the Žduciary to get sepa- rate counsel on the removal issue. It furthers seems to suggest, at least in Hamilton County, that the attorney who is representing the Žduciary in the removal action, will likely wait to have his fees, with the fees of the attorney for the Žduciary in the administration, be considered together with respect to fee approval, at the end of the administration. While the attorney for the Žduciary in the removal matter can certainly reasonably take the position that he is carrying out the will of the decedent by maintaining the position of the Žduciary selected by the decedent, it would seem that arguing that the fees for that representation should be borne by all of the beneŽciaries might pull that second at- torney into a conict position. Perhaps there should be a third attorney to make that argument to the Probate Court when the time comes to seek fees. For those of us who practice in the estate admin- istration Želd, perhaps the most surprising thing about the Robertson case is that there is no refer- ence in the record to ORC § 5815.16. Section 5815.16 provides, in its entirety, as follows: (A) Absent an express agreement to the contrary, an attorney who performs legal services for a Žduciary, by reason of the attorney performing those legal ser- vices for the Žduciary, has no duty or obligation in contract, tort, or otherwise to any third party to whom the Žduciary owes Žduciary obligations. PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 206 K 2016 Thomson Reuters
- 29. (B) As usedin this section, “Žduciary” means a trustee under an express trust, or an executor or administrator of a decedent’s estate. In the Robertson case, a complaint was brought by a local bar association against an attorney for violating a duty that the statute says he does not have. In Robertson, the attorney was disciplined, in part, for failing a duty which Section 5815.16 strongly indicates does not exist. Further, the pro- visions of Section 5815.16 were not mentioned ei- ther in the Žndings of fact, conclusions of law, and recommendation of the Board of Professional Conduct of the Supreme Court, nor by the Supreme Court itself. It seems reasonable to believe that neither the panel nor the court was aware of the provisions of Section 5815.16. It is clear that the Supreme Court has the right to govern the conduct of attorneys practicing in Ohio. It seems possible that the Supreme Court can substitute its judgment on these matters for the judgment of the Legislature. Nonetheless, it is troubling that, in light of a statute that says there is no duty to beneŽciaries, an attorney has been disciplined for a conict with respect to such duties. This suggests that tacticly, an application to remove a Žduciary should have more beneŽts now since such a motion will arguably require a Ždu- ciary to retain a second attorney. Even without reference to 5815.16, the comment on Rule 1.7 states “In estate administration, the identity of the client may be unclear under the law of a particular jurisdiction. Under one view, the cli- ent is the Žduciary; under another view the client is the estate or trust, including its beneŽciaries. In order to comply with conict of interest rules, the lawyer should make clear the lawyer’s relationship to the parties involved.” This comment suggests, to me, that even without the Ohio statute, the pos- sible duty to estate beneŽciaries is less clear than the Board of Professional Conduct’s Findings of Fact and Conclusions of Law would suggest. It fur- ther suggests that, in addition to the protection provided in 5815.16, attorneys make certain, in engagement letters, that the identity of the client is clear. I believe most estate administration at- torneys believe their client is the Žduciary, but this opinion shows the importance of making that clear. Interestingly, here the beneŽciaries, to whom the Board viewed the attorney as owing a duty, had their own attorneys, and seem neither to have complained about the attorney’s conduct or had any confusion about who the attorney represented. If the Žduciary had hired two attorneys, one to continue to represent her as executor, and one to represent her individually on the removal and inventory issue, it seems likely that they would have given her dierent advice. The position that the attorney represents only the Žduciary and not the other beneŽciaries seems preferable. SUMMARY OF GEHRKE V. SENKIW, 2016-OHIO-2657 By Richard Kolb, Esq. Toledo, Ohio The author was counsel for plaintis in this case. OVERVIEW On April 22, 2016, the Second District Court of Appeals reached a decision in Gehrke v. Senkiw which has immense consequences for estate plan- ning attorneys. Based upon a 1976 Ohio Supreme Court decision, the Appellate Court held in eect that an ordinary pour over clause is an incorpora- tion by reference clause. This author believes that if this decision is fol- lowed by Ohio probate practitioners, then when- ever you have a pour over clause in your will, you are required to incorporate the trust by reference as a testamentary trust and administer the trust and its assets in the probate court. FACTS This case involved a trust contest and a chal- lenge to certain inter vivos transfers. The decedent, Maureen Kramariuk’s will was not challenged. Item II in Mrs. Kramariuk’s will reads as follows: Residuary Bequest. I give, devise and bequeath all of my residuary estate, being all property, real and personal, whatsoever (sic) situate to the Successor Trustee (hereinafter referred to as Trustee) of the Amended and Restated Revocable Living Trust Agreement between MAUREEN E. KRAMARIUK, myself, as Grantor, and as Original Trustee, and PETER SENKIW, hereinafter referred to as Succes- PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 207K 2016 Thomson Reuters
- 30. sor Trustee, datedthe 30 day of July, 2013, as may be amended to the date of my death, but actually ex- ecuted prior to the signing of this, my Will, subject to all the terms and conditions, uses and trusts and powers as contained therein. The language above is consistent with the Ohio pour over statute ORC 2107.63 which reads in pertinent part: A testator may by will devise, bequeath, or appoint. . .property. . .to a trustee of a trust. . .that is identiŽed in the will. . .The property or interest so devised,. . .shall become a part of the trust estate. . .and shall be administered in accordance with the terms. . .of the. . .trust. . . (Emphasis added) I believe that all estate planning attorneys in Ohio would consider this language from Mrs. Kramari- uk’s will to be pour over language, not incorpora- tion by reference language. Defendant Žled a Motion for Summary Judgment based on the argument that plaintis only contested the trust and did not also contest the will. It has been long established that you must contest the will as well as the trust when the will contains an incorporation by reference clause. The trial judge treated this clause from Mrs. Kramariuk’s will as both a pour over and an incorporation by reference clause: “the Court Žnds that the 2013 Will incorporates the 2013 Trust by reference. The pour over provision identiŽes the 2013 Trust, refers to the trust as being in existence and manifests an intention to incorporate the trust by reference.” These statements appear at page 11-12 of the trial court’s decision dated August 14, 2015 which can be found on the Montgomery County Probate Court’s website at: http://www.mco hio.org/government/courts/common pleas cour t - probate division/prodcfm/CASESEARCH DOCKETm.cfm?52514B51585405050906080C02. Note the clause used in Mrs. Kramariuk’s will is not restricted to situations where the trust is otherwise invalid. Further, the above clause does not even mention the words “in- corporate” or “incorporation by reference.” Nevertheless, based upon the similarity between the clause used in this will and the clause used in the Ohio Supreme Court case of Hageman v. Cleveland Tr. Co., 45 Ohio St. 2d 178 (1976), the trial court reached the conclusion that this lan- guage incorporated the will by reference. THE COURT OF APPEALS DECISION The Court of Appeals armed the trial court’s decision based upon Hageman. In construing Ohio’s incorporation by reference statute, ORC 2107.05, the Court of Appeals stated at ¶ 14 that this stat- ute requires that: “(1) the will refer to the trust as one already in existence; (2) the will’s reference to the trust clearly identiŽes the trust and (3) the language of the will demonstrates an intent on the part of the testator to incorporate the trust into and make it a part of the will,” citing Linney v. Cleveland Trust Company, 30 Ohio appellate 345 (8th Dist. 1928). The Appellate Court went on to discuss Hage- man, which had a will clause very similar to the Kramariuk clause, deciding that “while we might not otherwise conclude that the Kramariuk will clearly manifests an intent to incorporate by refer- ence, we conclude that we are bound by the Su- preme Court holding in Hageman.” (¶ 17) Once again, the clause used in Hageman is not restricted to situations where the trust is otherwise invalid. Further, it does not even mention the words “incorporate” or “incorpo- ration by reference.” Thus the Court of Appeals rearmed Hageman and its language similar to the language used in Item II of the Kramariuk will above, Žnding that the Kramariuk will clause was an incorporation by reference clause: “. . .we conclude that the probate court did not err in concluding that Item II of the 2013 Will incorporated the 2013 Trust and Amend- ment into the will by reference.” IMPLICATIONS OF THIS DECISION Because the will clause in both the case at bar and Hageman are clearly pour over clauses and not incorporation by reference clauses, this appellate decision based upon Hageman now converts simple pour over clauses to incorporation by reference clauses, even where there is no mention of the term PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 208 K 2016 Thomson Reuters
- 31. incorporation by referenceand even when it is not limited to a failure of the inter vivos trust. This author believes that the consequences of this decision are dire: whenever you have a pour over clause, you must incorporate the inter vivos trust into the will and treat the trust as a testamen- tary trust, thereby making the trust terms and as- sets a matter of public record and increasing estate administrative costs. This will result is some very unhappy clients who were banking on “avoiding probate” and some highly embarrassed attorneys. I am being urged to appeal this decision to the Ohio Supreme Court. UNBUNDLING OF TRUSTEE FEES AND OTHER EXPENSES UNDER TREAS. REG. 1.67-4 By Kevin G. Robertson, Esq. Baker & Hostetler LLP Cleveland, Ohio Member, PLJO Editorial Advisory Board Code section 67(e)(1) allows an estate or trust to claim deductions for administration expenses (including trustee fees) without being subjected to the 2%-of-adjusted-gross-income oor, “for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate.” (Emphasis added.) The language and meaning of Code section 67(e)(1) were the subject of litigation for many years, culminating in the United States Supreme Court’s decision in Knight v. Commissioner, 552 U.S. 181 (2008); see also Rudkin Testamentary Trust v. Commissioner, 467 F.3d 132 (2nd Cir. 2006); Scott v. United States, 328 F.3d 132 (4th Cir. 2003); Mellon Bank, N.A. v. United States, 265 F.3d 1275 (Fed. Cir. 2001); and O’Neill v. Commissioner, 994 F.2d 302 (6th Cir. 1993). Ultimately, the Supreme Court held that invest- ment advisory fees paid by a trustee to a third- party investment manager were subject to the 2%- of-adjusted-gross-income oor when computing the net deductions allowable to a trust or estate under Code section 67(e)(1), and the general rationale adopted by the Supreme Court in interpreting Code section 67(e)(1) was that the 2% oor should apply to expenses incurred by a trust or estate if such ex- penses are of a type that is “commonly” or “custom- arily” incurred by individual taxpayers. In other words, the ordinary and necessary administration expenses (including Žduciary fees) incurred by a trust or estate are “fully” deductible (not subject to the 2% oor) only if and to the extent that such expenses are not “commonly” or “custom- arily” incurred by individual taxpayers who are managing personal investments or business inter- ests “free of trust.” It took the Treasury Department several years to formulate its Regulations in response to the Knight decision, but Žnal Regulations eventually were issued, eective for taxable years beginning after 12/31/2014 (i.e., commencing with calendar year 2015 Žduciary income tax returns), which Regulations provide some guidance to Žduciaries regarding how to allocate and categorize trust and estate expenses as between (a) expenses “not” com- monly or customarily incurred by individual inves- tors (i.e., expenses that are fully deductible, not subject to the 2% oor on miscellaneous itemized deductions); and (b) expenses that “are” commonly or customarily incurred by individual investors (i.e., expenses that are deductible only after reaching the 2% oor). Treas. Reg. 1.67-4(a) (eective for taxable years beginning after 12/31/14) provides the following general rule for deducting a cost incurred by an estate or trust: “A cost is subject to the 2-percent oor to the extent that it is included in the deŽnition of miscel- laneous itemized deductions under section 67(b), is incurred by the estate or non-grantor trust, and commonly or customarily would be incurred by a hypothetical individual holding the same property.” 1.67-4(a)(last sentence, emphasis added) Treas. Reg. 1.67-4(b) & (c) provide additional guidance regarding the categorization of various dierent types of administrative costs incurred by an estate or trust: PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 209K 2016 Thomson Reuters
- 32. “In analyzing acost to determine whether it com- monly or customarily would be incurred by a hypo- thetical individual owning the same property, it is the type of product or service rendered to the estate or non-grantor trust in exchange for the cost, rather than the description of the cost or service, that is determinative. In addition to the types of costs described as commonly or customarily incurred by individuals in paragraphs (b)(2), (3), (4) and (5) of this section, costs that are incurred commonly or customarily by individuals also include, for ex- ample, costs incurred in defense of a claim against the estate, the decedent, or the non-grantor trust that are unrelated to the existence, validity, or administration of the estate or trust.” 1.67-4(b)(1). Bundled Fees. “If an estate pays a single fee, commission or other expense (such as a Žduciary’s commission, attorney’s fee or accountant’s fee) for both costs that are subject to the 2-percent oor and costs (other than a de minimis amount) that are not, then, except to the extent provided other- wise in guidance published in the Internal Revenue Bulletin, the single fee, commission or other expense (bundled fee) must be allocated, for pur- poses of computing the adjusted gross income of the estate or non-grantor trust in compliance with section 67(e), between the costs that are subject to the 2% oor and those that are not.” Reg. 1.67- 4(c)(1). Special Rule for Non-Hourly Fees. “If a bundled fee is not computed on an hourly basis, only the portion of that fee that is attributable to invest- ment advice is subject to the 2-percent oor; the remaining portion is not subject to that oor.” Reg. 1.67-4(c)(2). NOTE: For any “non-hourly” fees (e.g., “percentage-of-value” trustee fees, executor com- missions or “Žxed amount” fees not tied directly to time spent in providing services), the rule is nominally more generous. Only “the portion. . .attributable to investment advice” is subject to the 2% oor. However, note that “sepa- rately billed” amounts paid to third parties (see “Expenses Not Subject to Allocation” immediately below) are evaluated and categorized separately. Expenses Not Subject to Allocation. Separately billed out-of-pocket expenses “are treated as sepa- rate from the bundled fee”; and “payments made from the bundled fee to third parties that would have been subject to the 2-percent oor if they had been paid directly. . .are subject to the 2-percent oor, as are any fees or expenses separately as- sessed by the Žduciary. . .for services rendered to the estate or non-grantor trust that are commonly or customarily incurred by an individual.” Reg. 1.67-4(c)(3). NOTE: For example, if a Trustee charges an “unbundled” percentage fee, and then “contracts out” the investment advisory services (i.e., paying the investment advisor(s) separately “out of” the Trustee’s “unbundled” fee), then the investment advisor expense incurred by the Trustee would be treated as if “directly” paid out of the Trust for investment advice, and that amount would be subtracted from the Trustee’s “unbundled fee” amount and subjected to the 2% oor (with the bal- ance of the Trustee’s fee presumably not being subject to the 2% oor). Reasonable Method. “Any reasonable method may be used to allocate a bundled fee between those costs subject to the 2-percent oor and those costs that are not. . .. Facts that may be considered in determining whether an allocation is reasonable include. . .the percentage of the value of the corpus subject to investment advice, whether a third party advisor would have charged a comparable fee for similar advisory services, and the amount of the Žduciary’s attention. . .that is devoted to invest- ment advice as opposed to dealings with beneŽcia- ries and distribution decisions and other Žduciary functions.” Reg. 1.67-4(c)(4). SPECIFIC EXAMPLES SET FORTH IN THE REGULATIONS The Regulations include some speciŽc examples of costs subject to the 2% oor and other costs that are not subject to the 2% oor: Ownership Costs. “Ownership costs are costs that are chargeable to or incurred by the owner of the property simply by reason of being the owner of the property. . ..[O]wnership costs are commonly and customarily incurred. . .[and] include, but are PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 210 K 2016 Thomson Reuters
- 33. not limited to,partnership costs deemed to be passed through to and reportable by a partner if these costs are deŽned as miscellaneous itemized deductions. . ., condominium fees, insurance premiums, maintenance and lawn services, and automobile registration and insurance costs.” NOTE: Third-party custody fees presumably fall within “ownership costs.” However, if a corporate trustee is “its own” custodian and includes such fees within its “unbundled” trustee fee, Reg. 1.67- 4(c)(2) suggests otherwise. Tax Preparation Fees. Costs for preparing dece- dent’s Žnal return, as well as estate/GST tax returns and Žduciary income tax returns all are “not subject to the 2-percent oor” per Reg. 1.67- 4(b)(3). Investment Advisory Fees. Investment advisory fees generally are deemed “commonly and custom- arily incurred” except for any incremental cost that represents “investment advice beyond the amount that normally would be charged to an individual investor.” Reg. 1.67-4(b)(4). For example, “a special additional charge that is added solely because the investment advice is being rendered to a trust or estate rather than to an individual attributable to an unusual investment objective or the need for a specialized balancing of the interests of various parties (beyond the usual balancing of the varying interests of current beneŽciaries and remainder- men) such that a reasonable comparison with indi- vidual investors would be improper.” NOTE: Does duty to diversify qualify as an “unusual investment objective?” What about other aspects of the Prudent Investor Act? The burden will be on the taxpayer to demonstrate that any “extraordinary” investment expense was incurred speciŽcally to fulŽll a Žduciary duty that requires “dierent” investment management functions than those “commonly or customarily” provided to indi- vidual investors. Appraisal Fees. Appraisal fees for valuations needed for estate tax returns or for purposes of distributions to beneŽciaries are not subject to the 2% oor, but appraisals for insurance purposes are subject to the 2% oor. Reg. 1.67-4(b)(5). NOTE: Appraisals obtained to challenge prop- erty tax valuations presumably would be subject to the 2% oor. Certain Fiduciary Expenses. Examples of “other” Žduciary expenses not commonly or customarily incurred by individuals include “probate court fees and costs; Žduciary bond premiums; legal publica- tion costs of notices to creditors or heirs; the cost of certiŽed copies of the decedent’s death certiŽcate; and costs related to Žduciary accounts.” Reg. 1.67- 4(b)(6). WHAT ARE COMMERCIAL CORPORATE TRUSTEES DOING? From an informal canvassing of various com- mercial banks and trust companies, it appears that many corporate Žduciaries already have “un- bundled” most of their fees by charging separately for “investment management services” (subject to the 2% oor) and “other Žduciary services” (100% deductible). In situations where “bundled” Žduciary fees still exist, corporate Žduciaries reserve the right to determine a case-by-case allocation or “unbundling” of their fees, with a “default unbun- dling” allocation typically in the range of 40%-60% being for “investment management services” (sub- ject to the 2% oor), and with the balance (60%- 40%) being for “other Žduciary services” not subject to the 2% oor. Guardianships and Special Needs Trusts (due to the more intensive attention required regarding distributions and accounting) generally are subject to a heavier allocation to “non-investment-related” services (e.g., a 75%-25% split, with only 25% being subject to the 2% oor). In situations where all investment decisions are “directed” (e.g., where an individual Trust Advisor has full responsibility for investment decisions), all corporate trustees treat the full “trustee/agency fee” as not being subject to the 2% oor, since by deŽnition the corporate trustee has no investment responsibility in those situations and, therefore, the full amount of the trustee’s fees is “not” related to investment advice or investment management. For large, fully-managed accounts (i.e., accounts where investment advisory fees and “Žduciary fees” combined may fall in the 60-80 basis point range PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 211K 2016 Thomson Reuters
- 34. due to economiesof scale), some corporate trustees have adopted a conservative allocation of 15-25 basis points as the portion of Žduciary fees attrib- utable to “non-investment-related Žduciary func- tions,” with any excess being subject to the 2% oor as relating to investment advice or investment management. In each case, the portion of Žduciary fees being allocated by a bank or trust company to “invest- ment services” (i.e., the portion of “unbundled” trustee fees subject to the 2% oor) must be defended by reference to the percentage fees charged for “pure” investment advisor/agency ar- rangements maintained by individual investors (or to trust accounts with an individual trustee who is using the bank or trust company solely as an “investment manager”). For individual trustees or executors who must apply these new “unbundling rules,” reference to “comparable” fees and allocations made by com- mercial banks and trust companies may provide helpful “benchmarks.” VALUATION: BEYOND THE BASICS By William R. Graf, Esq. Graf Stiebel & Coyne Cincinnati, Ohio Member, PLJO Editorial Advisory Board Based on a presentation by the author at the Ohio ACTEC meeting in Columbus on April 17, 2016 INTRODUCTION The United States Constitution empowers Con- gress to “lay and collect Taxes. . .” (Article I, Sec- tion 8); but it requires that “direct Taxes shall be apportioned among the several states . . . accord- ing to their respective Numbers. . .” (Article I, Sec- tion 2). The Constitution speciŽcally prohibits a “Capitation, or other direct, Tax . . . unless in Proportion to the Census or Enumeration . . . directed to be taken” (Article I, Section 9). In 1895, the Supreme Court held that income taxes were direct taxes and therefore unconstitu- tional because they were not apportioned among the states in accordance with the Census. Pollack v. Farmers’ Loan & Trust Co., 158 U.S. 601 (1895). So, after the Pollack decision, an eort was launched to amend the Constitution, and in Febru- ary, 1913, the Sixteenth Amendment was ratiŽed, reading: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” The Sixteenth Amendment said nothing about transfer taxes, and they remain subject to the orig- inal language of the Constitution. In 1899, the Supreme Court considered the constitutionality of a legacy tax. It determined that the tax was an indirect excise on the privilege of transferring prop- erty from the dead to the living. Knowlton v. Moore, 178 U.S. 41 (1899). The reasoning of the Knowlton case was extended to the estate tax and later to the gift tax. New York Trust Company, et al. v. Eisner, 256 U.S. 345 (1921). Transfer taxes pass muster under the Constitution because they are indirect excise taxes on the privilege of transferring property. They also satisfy a second Constitutional requirement that they be geographically uniform throughout the United States. In 1940, the Supreme Court made it clear that state law determines the property rights held by a taxpayer: “State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed.” It is not federal law that determines the bundle of rights held by the taxpayer. It is state law that as- sembles that bundle, stick by stick. Once assembled by state law, the federal law determines the tax. Recognizing that transfer taxes could not apply directly to property, the government looked for a valuation standard that would work for a tax on the privilege of transferring property. Rather bril- liantly, the government settled on a standard where a hypothetical buyer and a hypothetical seller would set the value: “The fair market value is the price at which the prop- erty would change hands between a willing buyer and a willing seller, neither being under any compul- sion to buy or to sell and both having reasonable knowledge of relevant facts.” Reg. § 20.2031-1(b). PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 212 K 2016 Thomson Reuters
- 35. Case law andRulings make it clear that the buyer and seller are hypothetical. The government would have a much easier time if it could directly tax a decedent’s property or a donor’s property. But, it cannot constitutionally do this. Additionally, the states are on the side of the taxpayers. They would just as soon keep the tax dollars in the state, rather than lose them to Washington. The number of separate Ohio statutes designed to protect our citizens from adverse federal tax consequences is substantial. There are provisions protecting the marital deduction, provi- sions protecting the charitable deduction, provi- sions protecting § 2642 trusts, provisions protecting Subchapter S elections, provisions negating inad- vertent waivers of apportionment rights, and so on. Comparing this to the income tax, where the federal government has no Constitutional disad- vantage, one wonders why they even bother with transfer taxes. But, that is a very complicated subject. WHAT IS GOING ON WITH THE § 2704(B) REGULATIONS THAT WE EXPECTED TO SEE LAST SEPTEMBER? § 2704 was enacted in 1990 as a part of Chapter 14, and initial Regulations followed in 1992 (all § references are to the Internal Revenue Code of 1986 or Regulations under that Code). For family controlled corporations and partnerships, § 2704(b) disregarded liquidation restrictions for valuation purposes if, after the transfer, the restriction lapsed or could be removed by the transferor or a family member, either alone or collectively. There were two basic exceptions to disregarding the restriction: E A commercially reasonable restriction arising from a Žnancing arrangement with a non- family member. E “any restriction imposed, or required to be imposed, by any Federal or State law.” The Regulations modiŽed the second exception to a restriction that is not “more restrictive than the limitations that would apply under the State law generally applicable to the entity in the absence of the restriction.” Reg. § 25.2704-2(b). § 2704(b)(4) granted authority for Treasury to add “other” restrictions to be disregarded in determining the value of a transfer if the restriction “has the eect of reducing the value of the transferred interest . . . but does not ultimately reduce the value of such interest to the transferee.” In the 2003-2004 Priority Guidance Plan1 , additional guidance regarding § 2704 was planned, and in the 2010- 2011 Priority Guidance Plan, additional § 2704 Regulations were included on the list. In 2009, the President proposed statutory changes to § 2704 in his “General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals” (“Greenbook”)2 . The President proposed an additional category of restrictions (“disregarded restrictions”) that would be ignored, if after the transfer, the restriction lapsed or could be removed by the transferor or the transferor’s family. The transfer would then “be valued by substituting . . . certain assumptions to be speciŽed in regulations.” Under the Greenbook proposals, disregarded re- strictions would also include: E liquidation restrictions more restrictive than a standard to be identiŽed in regulations. E “any limitation on a transferee’s ability to be admitted as a full partner or to hold an equity interest in the entity.” And, in determining whether a restriction could be removed by members of the family after the transfer, the Greenbook proposals would consider certain interests owned by charities or other non- family members to be held by the family. All of this was to be eshed out in regulations. The Greenbook proposals would also grant regulatory authority for creation of safe harbors and “conforming clariŽca- tions” regarding the eect of the proposals on the marital and charitable deductions. These Green- book proposals were also included, without substan- tive change, in the 2011, 2012, and 2013 Green- books but were omitted in the 2014, 2015, and 2016 Greenbooks. No bill expanding § 2704(b) as pro- posed by the President was ever introduced in Congress. At the May, 2015, meeting of the ABA Tax Sec- tion, Cathy Hughes (“Cathy”) from the IRS Oce of Tax Policy, said that Regulations would be issued under the authority of § 2704(b)(4), possibly by mid- PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 213K 2016 Thomson Reuters
- 36. September, 2015. Cathyintimated that the new Regulations would be similar to the Greenbook proposals. On August 31, 2015, Richard L. Dees (“Richard”), a partner at McDermott Will & Emory, and one of the foremost authorities on Chapter 14, wrote a 29 page letter to Treasury and the IRS explaining in detail why the anticipated Regulations would be invalid3 . Richard said that the anticipated Regula- tions “would be inconsistent with Chapter 14’s origin, legislative history, and purpose;” and he pointed out: E that the anticipated Regulations would cause family business equity interests to be taxed at a higher rate than non-family business equity interests, E that Chapter 14 does not distinguish between passive investment companies and active busi- nesses, and E that Treasury does not have the power to substitute new restrictions for disregarded restrictions. On November 6, 2015, Jonathan Blattmacher, a proliŽc writer and speaker on estate planning top- ics, reported that Leslie Finlow (“Leslie”) of the IRS Oce of Associate Chief Counsel stated at the AICPA Fall Tax Division meeting that the § 2704(b) regulations will follow the statute - not the Greenbook. According to Jonathan’s e-mail, Leslie said “[t]here seems to be some confusion as to exactly what the guidance will rely on. We are look- ing to the statute as it is now. We are not looking at the Greenbook.” On March 17, 2016, Ron Aucutt (“Ron”), Wash- ington insider and highly regarded estate planning lawyer with McGuireWoods, said he believes that the § 2704 Regulations will aect entities as follows: E “most safe: Operating businesses. E next most safe: Entities with assets like rental real estate. E most at risk: Entities with marketable securi- ties and cash.” Ron also believes that “the source of the restric- tion” will be important: E “Restrictions created by the transferor are most suspect. E Restrictions created by transferor’s generation are next. E Inherited or acquired restrictions are safest.” Ron did not address how Treasury will have the authority to accomplish all of these changes with Regulations. No one knows exactly when the Regulations will be issued, but Cathy recently conŽrmed that they will be out “soon.” VALUATION OF S CORPORATIONS In 1999, Judge Halpern issued his decision in Gross v. Commissioner, T.C. Memo 1999-254, which was subsequently armed by the Sixth Circuit Court of Appeals. Gross v. Commissioner, 272 F.3d 333 (6th Cir. 2001). Gross accepted the expert opinion of Dr. Mukesh Bajaj that in valuing S corporations, it is not appropriate to reduce earn- ings by hypothetical corporate level income taxes when comparing them to C corporation after tax earnings data. This reduction is commonly referred to as “tax- aecting.” After Gross, a number of other cases followed suit. In 2015, a “Job Aid for IRS Valuation Analysts” was released by the IRS pursuant to a Freedom of Information Act request4 . The Job Aid was pre- pared for internal purposes only and is not an of- Žcial IRS position. As such, it may not be cited as authority for any legal position. But, it does give taxpayers an idea of the IRS position on tax- aecting. The Job Aid states that “absent a com- pelling showing that unrelated parties dealing at arms-length would reduce the projected cash ows by a hypothetical entity level tax, no entity level tax should be applied in determining the cash ows of an electing S corporation.” The Job Aid goes on to say that “personal income taxes paid by the holder of an interest in an elect- ing S corporation are not relevant in determining the fair market value of that interest.” These IRS PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 214 K 2016 Thomson Reuters
- 37. positions are notsurprising given the judicial sup- port they have received. But, there is also some good information for taxpayers. The Job Aid says that “pass-through entities should be, where at all possible, compared to other pass-through entities in the valuation process.” While comparable pass- through data is hard to Žnd, valuation Žrms will likely Žgure this out. Several speciŽc factors that “may deserve special attention” are discussed: E it may be harder for S corporations to raise debt and equity capital due to the limited number of interest holders, the single class of stock, and the “straight debt” rule. E the “impact of these requirements should be evaluated as part of determining an appropri- ate rate of return to be used in the valuation.” E since the types of investors are restricted for S corporations, the “pool of hypothetical buyers might be smaller than would otherwise be the case.” The Summary lists factors for “speciŽc consideration by the Valuation Analyst”: E “size and composition of the pool of hypotheti- cal buyers.” E “economic interests of the hypothetical seller.” E “actual revenues available to and the actual expenses to be paid by the entity that has elected to be taxed as an S corporation.” E “availability at the entity level of equity and debt capital.” E “likely holding period of the transferred interest.” The Summary concludes by saying that tax- aecting is inappropriate “absent a compelling demonstration that independent third parties deal- ing at arms-length would do so as part of a purchase price negotiation.” The Job Aid seems to oer a compromise to taxpayers by arming the prohibi- tion against tax-aecting while opening the door to special valuation reductions occasioned by the unique limitations imposed upon S corporations. And, as time goes on, more data may be available on actual transactions involving interests in pass- through entities so that valuation experts can compare apples to apples, as the Job Aid suggests. ESTATE TAX AGGREGATION OF ASSETS Estate of Bonner, Sr. v. US, 84 F.3d 196 (Fifth Cir. 1996), was a welcome, and somewhat surpris- ing, decision from the Fifth Circuit Court of Ap- peals, in 1996. It held that, for valuation purposes, QTIP assets included in a surviving spouse’s estate under § 2044 would not be aggregated with assets owned outright by the surviving spouse and in- cluded under § 2033. The Court explained that the “assets, although taxed as if they passed through [Mr.] Bonner’s estate, in fact were controlled at every step by Mrs. Bonner, which a tax valuation with a fractional discount would reect.” A few years later, the full Tax Court followed suit in Estate of Mellinger v. Commissioner, 112 T.C. 4 (1999). In a 33 page Opinion, the Tax Court explained its reasoning thoroughly. The Court found that “at no time did decedent possess, control, or have any power of disposition over the FOH shares in the QTIP trust. Cf. secs. 2035, 2036, 2041 (requiring inclusion in the gross estate where a decedent had control over the assets at some time during her life).” Bonner and Mellinger are fairly well known cases among the estate planning community. The general understanding is that for valuation purposes, QTIP assets included under § 2044 are not aggregated with individually owned assets included under § 2033. This means that if a QTIP trust held 30% of the voting stock in a privately owned business and the surviving spouse beneŽciary of that QTIP Trust also held 30% of the voting stock in her own name, both 30% blocks would be valued on a minority basis. These holdings are favorable to taxpayers and oer valuable planning techniques to owners of family businesses. But the general perception of the holdings could be a trap for estate planners. In both Bonner and Mellinger, it is clearly stated that the surviving spouse had no control or power of dis- position over the QTIP assets. While QTIP trusts often give no control or power of disposition to the surviving spouse, that is not necessarily so with all QTIPs. A QTIP trust might PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 215K 2016 Thomson Reuters
- 38. include powers ofappointment that could be quite broad. The question is whether the decisions in Bonner and Mellinger would be dierent if the surviving spouse had signiŽcant powers of disposition. Given the emphasis on lack of control and power of disposition in the two opinions, it is unlikely that the decisions turned solely on the fact that the assets were held in a QTIP trust. The sec- tion bringing assets into the gross estate is not the determining factor - it is the lack of power held by the surviving spouse. When engaging in planning to achieve separate minority block valuations, it would be wise to provide no control or power of dis- position to the surviving spouse in the QTIP trust. PLANNING WITH § 2703 The general rule of § 2703 provides that an “op- tion, agreement or other right to acquire or use” property for less than fair market value will be ignored for valuation purposes. There is an excep- tion to this rule for “any option, agreement, right, or restriction” that meets speciŽed requirements: E “It is a bona Žde business arrangement.” E “It is not a device to transfer such property to members of the decedent’s family for less than full and adequate consideration. . .” E “Its terms are comparable to similar arrange- ments entered into by persons in an arms’ length transaction.” Most of us have experience with an IRS Estate Tax Attorney (“ETA”) challenging our appraisals. The ETA often does this without any independent valuation information supporting his or her position. Sometimes the ETA will have an IRS Engineer’s report and occasionally they will have a critique from an outside appraisal Žrm which simply disputes aspects of our appraisal without giving an opinion of value. This process can be frustrating because it seems like the taxpayer has to play by the valuation rules and the IRS does not. Consider having your client enter into a Buy-Sell Agreement with family members, and make sure that the agreement qualiŽes under § 2703. Provide that the value will be determined by a business ap- praiser who is qualiŽed by education and experi- ence pursuant to the valuation standard provided in § 2031. Perhaps even name the valuation Žrm. Then consider getting an opinion from an experi- enced business lawyer stating that the Buy-Sell Agreement is “comparable to similar arrangements entered into by persons in an arms’ length transaction.” This will not be dicult for the busi- ness lawyer because the terms of the Buy-Sell Agreement will, in fact, be very similar to the terms of agreements entered into at arm’s length. When the agreement is triggered upon death, and the ETA tries to Žnd fault with the appraisal, you can explain: E that the value is controlled by Chapter 14, the Special Valuation Rules, more speciŽcally § 2703. E that all of the conditions required by the stat- ute have been satisŽed. E and that we are all bound by the value estab- lished by the appraiser and it is not subject to attack by anyone, including the IRS, because we are all governed by § 2703. This planning option will not Žt with the speciŽc family situations of all privately owned businesses, but in certain cases it will be a very good option to consider. § 2703 does not just belong to the IRS. It can be used eectively by the taxpayer as well. AUDITS ETAs are busy, and they may not be motivated to move as quickly as we would like. It is not wise to just sit back and wait for the ETA to respond. Meet with the ETA as early as possible. If the ETA is out of town, go visit him or her. The visit will likely lower the total legal fees - not increase them. At the meeting, agree to a time table for each aspect of the audit. It is not in the taxpayer’s interest for the audit to drag on. You want to be sure to have time to go to the IRS Appellate Division if necessary. It is true that you will end up at Ap- peals even if you have to Žle a Tax Court petition, but that eats up more time and more money. Taxpayers almost always want audits to be resolved sooner rather than later. Taxpayers care about their case much more than the IRS does. Let the PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 216 K 2016 Thomson Reuters
- 39. ETA know earlyin the process that you have done a thorough and careful job on the Estate Tax Return. This will pay o very nicely. At every step of the process, let the ETA know that you will provide whatever they reasonably need to do their job. Be friendly, and establish a pleasant relationship if possible. If the ETA comes to your oce, treat him or her with courtesy and respect. At the same time, be consistent with your position that the taxpayer has Žled an Estate Tax Return in compliance with the law and with all Exhibits necessary to conŽrm that. If the ETA fails to cooperate or fails to follow the time table, request a meeting with the ETA’s Supervisory Attorney. This request will hardly ever be denied. And, the Supervisory Attorney will not likely support the ETA if he or she is not complying with a reason- able agreed-upon time table. If the ETA is unreasonable and does not seem to understand the applicable law, request a meeting with the Supervisory Attorney. If this means an- other out of town trip, so be it. The goal is to get the audit resolved on favorable terms as soon as possible. For this to happen, the taxpayer’s attorney must take the lead. If the ETA makes “a determi- nation or a proposed determination” of value that diers from the value reported by the taxpayer, consider requesting a written statement from the ETA pursuant to IRC § 7517. The ETA will have 45 days after the date of the request to send a state- ment that will: E “explain the basis on which the valuation was determined or proposed,” E “set forth any computation used in arriving at such value,” and E “contain a copy of any expert appraisal made by or for the Secretary.” The statute provides no consequences for failure of the ETA to comply, and the information fur- nished is not binding on the Secretary. But the request for a statement may get the audit moving and serve to bring the IRS to resolution of the case. WHY DO COURTS IGNORE § 2043 When assets are included in the gross estate under § 2036 (and certain other sections), there must be a reduction for the consideration received in the initial transfer. In gift transactions, there will not likely be any consideration received, but when FLPs and LLCs are formed, the partnership interests or LLC Units received on formation are the consideration. This makes sense because the taxpayer received assets that have value and are either still owned at death or were subject to gift tax during life. The law is clear that the “consideration received” is valued as of the date of the original receipt (i.e. the date the FLP or LLC was initially funded). U.S. v. Righter, 400 F. 2d 344 (8th Cir. 968); Estate of Magnin v. Commissioner, 184 F. 3d 1074 (9th Cir. 1999). So, the § 2036 assets come back into the gross estate at date of death values, and that total value is then reduced by the value of the consider- ation received on the date the entity was created. The Bongard case, which is a decision of the full Tax Court, says that upon formation of a business entity, if a transferor receives interests proportion- ate to the assets contributed, then there is “ade- quate and full consideration.” Bongard v. Commis- sioner, 124 TC 95 (2005). This is not usually true in reality because the business interests received by the transferor will be subject to downward reductions for lack of marketability and perhaps lack of control or other factors that depress value. Nevertheless, Bongard says that consideration received (i.e. the interest in the new entity) is deemed to be equal in value to the contributed assets, even if this is not exactly so in reality. In actual cases where § 2036 is applied to the formation of business entities, there is no mention of § 2043; there is no mention of reducing the amount of § 2036 inclusion; and there is no attempt to include the business interests that the trans- feror received on formation. Those interests are ignored and only the assets initially transferred are included. In the Holliday Tax Court Memo de- cision that came out in March, 2016, the Court ap- plied § 2036 to bring the value of assets transferred to a limited partnership back into the decedent’s estate. Estate of Holliday v. Commissioner, T.C. Memo 2016-51. But, there was no mention of PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 217K 2016 Thomson Reuters
- 40. § 2043, whichclearly should apply. Instead, follow- ing the lead of other decisions, the Court simply pretended that the partnership units no longer existed. We must remember that the Morgan case, re- ferred to earlier, held that state law determines property rights and federal law determines how those rights are taxed. The ignored FLP interests and LLC Units are almost always valid under state law, and the FLP or LLC still holds the assets (or replacements) that were subject to § 2036 inclusion. But, recognizing that double inclusion just cannot be right, the ignoring goes on. Judge Gerber concluded his decision in the Holliday case as follows: “Because we have held that the value of the assets is includible in the value of the gross estate, there is no need to consider or decide the amount of any discount attributable to the limited partnership interest.” T.C. Memo 2016-51 at page 19. Also see Estate of Malkin v. Commissioner, T.C. Memo 2009-212, Footnote 23, which instructs the parties to remove the value of 80,000 shares of stock from a limited partnership and include that value on Schedule G of the Estate Tax Return as a result of the application of § 2036. In all of these § 2036 cases, it is only the value of the assets that comes back into the gross estate. The actual assets transferred to the partnership or LLC stay right there because state law determines their residence - not federal law. One may wonder why taxpayers let this happen. They are likely concerned about double taxation under § 2036 for the assets that come back into the gross estate and under § 2033 for interests in the FLP or LLC that owns those assets. The IRS doesn’t like the idea of double taxation either, because it reveals the legal aw in the use of § 2036 in business formation cases. The aw is that when assets are transferred in business formation cases, the transferor and the recipient are essentially the same person. Assets are transferred to the FLP or LLC, and the transferor gets back partnership interests or LLC Units. Nothing is transferred to any other person. Courts like to say that the word “transfer” in § 2036 cases is broadly interpreted. But the estate tax is a tax on the “privilege” of transferring property, and it is hard to see the “privilege” when transferring property to oneself. In Audits, when the IRS proposes to apply § 2036, they say nothing about the § 2043 reduc- tion, and they do not try to double tax the assets. They simply bring the assets contributed to the FLP or LLC back into the gross estate and pretend the FLP or LLC was never funded. If there is not a great dierence in value between the date of contri- bution to the FLP or LLC and the date of death, the taxpayer will be better o with double taxation. The § 2043 reduction would substantially reduce the date of death § 2036 value, and the FLP inter- est or LLC Units would be valued with downward reductions for lack of marketability and perhaps minority. Even if double taxation could increase the tax, it may be wise to press the IRS for a § 2043 reduction in § 2036 inclusion cases. This will likely confuse them or worry them, and either reaction might bring them to the bargaining table. § 2036 was never the legally proper tool to attack FLPs and LLCs, but the Courts accepted it, and it now seems like well settled law. Insisting on a § 2043 reduc- tion can be used to the taxpayer’s advantage in ap- propriate cases. BEWARE OF THE STEP TRANSACTION DOCTRINE The step transaction doctrine utilizes the prin- ciples of “substance over form” by recharacterizing a series of formal steps as a single transaction if the “steps are in substance integrated, interdepen- dent, and focused toward a particular result.” Hol- man v. Commissioner, 130 TC 170, 187 (2008), quoting Santa Monica Pictures, LLC v. Commis- sioner, T.C. Memo 2005-104. In Pierre v. Commissioner, T.C. Memo 2010-106 (known as Pierre II), the taxpayer organized a single-member LLC and subsequently transferred all of her Units to two separate trusts - 50% to each. The 50% transfers consisted of a 9.5% gift to each trust and a sale of 40.5% to each trust. The gifts and the sales took place at essentially the same time, but the taxpayer contended that they were separate transactions. The taxpayer anticipated PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 218 K 2016 Thomson Reuters
- 41. higher downward adjustmentsfor 9.5% and 40.5% blocks than for 50% blocks. The Court concluded that the multiple steps were used “solely for tax purposes” and held that the taxpayer made two gifts of a 50% interest in the LLC, with credit given for the amount of each Note. In Holman the Court declined to impose the step transaction doctrine when the time interval be- tween funding the limited partnership and transfer- ring partnership interests was six days. Cutting it that close may work, but why take the chance? There are many step transaction issues reported in gift tax cases. Even when the taxpayer wins, there is expense, worry, and aggravation. Consideration of the step transaction doctrine in each transfer of partnership interests or LLC Units is essential. It is not hard to avoid and could be costly if it is not. ENDNOTES: 1Available on Internet; search “Priority Guid- ance Plan.” 2 Available on Internet; search “Administration’s Greenbook.” 3 Available on Internet; search “Richard Dees Letter.” 4 Available on Internet; search “IRS S Corp. Job Aid.” STRUCTURING TRUST ARRANGEMENTS TO HOLD FAMILY BUSINESS INTERESTS By James G. Dickinson, Esq. Cavitch Familo & Durkin Co., LPA Cleveland, Ohio 44114 Based on a presentation by the author at the Ohio ACTEC meeting in Columbus on April 17, 2016 In structuring trust arrangements that will receive, own, administer and distribute the equity interests in family-dominated businesses, the plan- ner should address the following issues: E fulŽllment of the settlor’s objectives E protection of the beneŽciaries’ interests E provision for protecting the Žduciaries E allowance for necessary modiŽcations E minimization of taxes The use of trusts can be traced to the Thirteenth Century in England where it was necessary to sep- arate the legal ownership of assets, principally land, from the beneŽcial equitable interests. Today the use of trusts where family businesses are involved calls for removing the ownership and control of the business interests from those persons who are to be beneŽted by the business interests. Treas. Reg. § 301.7701-4(a) states, in part: “Generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneŽciaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for proŽt.” The essential nature of the trust arrangement is that “the beneŽciaries [do] not, qua beneŽciaries, control trust aairs.” Bedell Trust v. Commissioner, 86 T.C. 1207, 1220 (1986). The separation of control and beneŽt of owning the assets illustrates the importance that the trust be administered by the trustee for the beneŽciaries and that the beneŽcia- ries’ rights are to monitor and enforce the discharge of the trustee’s duties, not take over. Aucutt, Ronald. (2014). Slicing and Dicing: Cutting to the Core of a Trust. ACTEC 2014 Fall Meeting, New Orleans. A “family business” is an enterprise in which ownership and management are dominated by members of an emotional kinship group. This group not only includes spouses and lineal family mem- bers but collateral relatives, such as siblings, cousins and in-laws. According to the Small Busi- ness Administration, family-owned businesses make up 90% of all business enterprises in North America and are responsible for 62% of employment. A study prepared by the Raymond James Institute included a survey of family busi- ness owners which concluded that 79% of the respondents want the business to remain a family business. Business succession planning may be deŽned as present planning for the transfer of ownership and management of a closely-held business to others. PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 219K 2016 Thomson Reuters
- 42. Business succession planningincorporates many familiar estate planning methods but it also goes beyond traditional estate planning to encompass a comprehensive plan for the introduction of succes- sor management and the eventual transfer of operating control to the current owner’s chosen successor. The concept includes assuring the owner- manager and his family the greatest economic beneŽts possible both in terms of investment secu- rity as well as minimization of taxes. A business succession plan has three sub-plans: E Financial Succession Plan - the manner in which stock or other Žnancial interests are transferred inside or outside the family. E Organizational Succession Plan - Who will as- sume the role of CEO, of President, of Trea- surer? At which times -death, disability, retirement? Who will serve on the Board of Directors? E Operational Succession Plan - will the succes- sors be trained in operating the business? By whom? Over what periods of time? WHY DO FAMILY BUSINESSES FAIL TO TRANSITION? For many years the traditional dogma was that high federal estate and gift tax rates impeded the transfer of ownership of family businesses between generations. Studies have shown that this simply is not the case. For example, an article authored by Roy O. Williams and Michael H. Morris published in the September, 1997 issue of The Journal of Business Venturing was entitled “Correlates of suc- cess in family business transitions.” The authors surveyed 209 second and third generation family business owners and inquired why family busi- nesses failed to transition between and among fam- ily members. Sixty percent of the respondents cited a failed relationship among family members and twenty-Žve percent responded that the heirs were simply not prepared to assume ownership and management of the business. Only ten percent responded that the cause was a lack of planning and control issues. Taxes were never mentioned as a problem. The authors concluded that “family busi- ness owners are encouraged to devote relatively more attention to relationship issues, and relatively less to estate and tax planning.” ROLE OF TRUST ARRANGEMENTS. What goals can a trust arrangement achieve for the current owners and managers of a family busi- ness? Since trusts have historically been used to separate the legal ownership of the assets from eq- uitable interests associated with the ownership, control has been divorced from the beneŽt of own- ing the asset. 1. Consolidation of Ownership. a. Voting Control. During the term of the trust the voting control of the business interests will be dictated by the terms of the trust agreement. Vot- ing control is directly aected by the capitalization of the entity’s interests. For example corporate stock can be recapitalized into common or pre- ferred interests, voting or nonvoting, etc. The organizational documents, such as the code of regulations, operating agreements and partner- ship agreements, can also provide for the control of the entity. The trust instrument can direct by whom the authority to vote the business interests will be given by speciŽcally naming the entities or by describing those entities by the percentage owned and held in trust. b. Continuity of Management. The instructions contained in the trust document can direct the trustee in the election and retention of named managers. 2. Timing of Distributions. The trust instrument can also determine when the legal and equitable interests will be merged by dictating when, if ever, the interests will be distributed to the beneŽciaries. 3. Incentive Trusts. The terms of the trust agree- ment can motivate the beneŽciaries to modify their behaviors and actions through both negative and positive reinforcements. 4. Protection of Non-Active Family Members. The trust agreement can instruct the trustee to take steps to protect trust beneŽciaries who are not active in the management of the business interests from the mismanagement of those who are. 5. Business Skill Trusts. The trustee can be in- structed to use the assets held in trust to educate the beneŽciaries in business management skills as well as general accounting and investment acumen. For example, see the Results Oriented Trust Envi- ronment (ROTE) introduced by Jon J. Gallo, Eileen Gallo and James Grubman in their article The Use and Abuse of Incentive Trusts: Improvements and Alternatives, 45 U. Miami Heckerling Institute on Estate Planning (2011). 6. Creditor Protection. Spendthrift provisions and other restrictions on the ability of the creditors of PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 220 K 2016 Thomson Reuters
- 43. beneŽciaries from attachingthe beneŽcial interests are often the most important reasons for holding the business interests in trust. 7. Choice of Law. Every jurisdiction has dierent rules concerning the scope, availability and ap- plicability of the methods for altering the trust ar- rangements, the tax consequences of holding the as- sets in trust as well as the availability of the fora for the resolution of disputes. 8. In Terrorem Clauses. These clauses can be used to limit a beneŽciary’s ability to challenge the validity of the trust arrangement as well as limit a beneŽci- ary’s ability to question the conduct of the trustee. Only Indiana and Florida expressly prohibit the enforcement of in terrorem clauses by statute. 9. Arbitration. Five states expressly allow the use of mandatory arbitration clauses in trust disputes by statute or case law. Only the District of Columbia expressly prohibits the use of mandatory arbitration clauses in testamentary documents. 10. Tax Avoidance and Minimization. While it is often the primary purpose of trust arrangements to reduce estate and generation-skipping taxes by limit- ing the rights of beneŽciaries it is now more common to use trusts to allocate the income tax burden be- tween and among the settlor, the trust itself and the beneŽciaries. THE PARTIES TO THE TRUST ARRANGEMENT. a. Settlor. The settlor of the trust arrangement has almost free rein to structure the terms, duties and respon- sibilities of the instrument and the parties. The Ohio Trust Code is primarily a default statute. Pursuant to OTC § 5801.04(A) the provisions of the OTC apply only to the extent the settlor has not provided otherwise in the terms of the trust. Section 5801.04(B) lists the exceptions that the settlor may not override in the terms the trust. Section 5 of the Report on H.B. 416. b. Trustee. The duties and responsibilities of the trustee are determined by the terms of the trust instrument, the Ohio Trust Code and case law. i. Duties Upon Assumption of Trusteeship. 1. OTC § 5809.04 describes the duties of a trustee at the inception of trusteeship. The section es- sentially provides that within a reasonable time after accepting a trusteeship or receiving trust as- sets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of trust assets. The trustee should bring the trust portfolio into compli- ance with the requirements and standards of the Ohio Uniform Prudent Investor Act. 2. Proper management of closely-held business as- sets requires the trustee to undertake additional responsibilities. The trust instrument should provide speciŽc guidance to the trustee of the se- ttlor’s expectations in managing the business interests. In his authoritative treatise, Fiduciary Management of a Closely-Held Business, Sheldon G. Gilman states that upon assumption of a trusteeship, the trustee should engage in due dili- gence in understanding the closely-held businesses that will constitute the corpus of the trust. Gil- man, Sheldon G., Fiduciary Management of a Closely-Held Business, section 4.3 (UK/CLE) (2007). (hereinafter cited as “Gilman”). The Ameri- can College of Trust and Estate Counsel has published a guide for clients serving as trustee. The guide was prepared by the Fiduciary Matters Subcommittee of the ACTEC Practice Committee. 3. Corporate Žduciaries often have their own checklists and guidelines for due diligence in ac- cepting and administering closely-held business interests. ii. On-Going Duties of the Trustee Holding Closely- Held Business Interests. Chapter 5808 of the OTC sets forth the duties of the trustee in the administration of a trust. Whenever a trustee intends to own and to operate a closely held business, including in corporate form, extraordinary measures must be undertaken to fulŽll the Žduciary duties to the beneŽciaries of the trust. Under com- mon law and prior statutory law, trusts and estates were generally limited or prohibited in continuing the operation of businesses. See Bogert & Bogert, Trusts and Trustees (2 Ed. Rev.1980) 303-304, sec- tion 573 (“The power to authorize continuance [of the business] applies to sole proprietorships, and to cases of partnerships * * *. It also applies to the con- tinuance of a business through complete or majority stock control of a corporation * * *.”). Huntington National Bank v. Wolfe, 99 Ohio App.3d 585, 651 N.E.2d 458 (10th Dist. 1994); see, also, In re Estate of Kurkowski, 487 Pa. 295, 301, 409 A.2d 357 (1979). Duty to Diversify Assets. OTC § 5809.03 states that the trustee may invest in any kind of property or type of investment provided that the investment is consistent with the requirements and standards of the Ohio Uniform Prudent Investor Act. The section goes on to say that a trustee shall diversify the investments of the trust unless the trustee reason- ably determines that, because of special circum- stances, the purposes of the trust are better served without diversifying. The limitations imposed on investment powers of all Žduciaries by ORC § 2109.37 provide “except as otherwise provided by law,. . ., or by the instrument creating the trust,. . .” Even before the adoption of the Ohio Trust Code, Ohio courts held that a corporate trustee had a mandatory duty to diversify trust assets unless there were special circumstances that excused diversiŽca- tion, even though the trust speciŽcally permitted the PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 221K 2016 Thomson Reuters
- 44. corporate trustee toretain its own stock that was al- ready in the trust when the corporate trustee was appointed. Wood v. U.S. Bank, N.A., 160 Ohio App. 3d 831, 2005-Ohio-2341, 828 N.E.2d 1072 (1st Dist. 2005) citing R.C. §§ 1339.54(B), 1339.56. Restate- ment of the Law 3d, Trusts (1992), § 227(b) states, “In making and implementing investing decisions, the trustee has a duty to diversify the investments unless, under the circumstances, it is not prudent to do so.” With regard to a trustee’s duty regarding orig- inal investments, the comments to the Restatement indicate that a broad generalization is not enough to relieve a trustee of its duty to diversify. The leading case in Ohio continues to be Stevens v. National City Bank, 45 Ohio St.3d 276, 544 N.E.2d 612 (1989) in which the Ohio Supreme Court found that “a trustee, except as otherwise provided by the terms of the trust, is under a duty to the beneŽcia- ries to distribute the risk of loss within the trust by prudent diversiŽcation, limiting the proportion of the total assets which are invested in any one stock or class of securities.” This duty includes the dis- posal or sale of investments in the trust at the time of its creation which, although otherwise proper investments to retain, are improper because such are not properly diversiŽed. See, also, Rebecca Schauerte Puhl, et al., v. U.S. Bank, N.A., 2015-Ohio- 2083, 34 N.E.3d 530 at 534 (12th Dist. 2015). iii. Ability of Trustee to Delegate Duties and Responsibilities. The Ohio Uniform Prudent Investor Act authorizes a trustee to delegate investment and management functions of a trust “that a prudent trustee having comparable skills could properly dele- gate under the circumstances.” OTC § 5809.06(A). OTC § 5808.07 requires a trustee to exercise reason- able care, skill and caution in the delegation of its responsibilities. Gilman at section 5.10 states “a Ž- duciary may not delegate certain acts and duties to another except where permitted by law or the instru- ment, and it is questionable whether such provisions would be eective for protecting the Žduciary.” FIDUCIARY DUTIES OWED TO OTHERS. 1. As a Majority Owner. If the business interests held in the trust constitute a majority ownership po- sition with unrelated parties owning minority interests, Ohio law provides that the majority owner has a Žduciary duty of fair dealing with the minority owners. The leading case in Ohio continues to be Crosby v. Beam, 47 Ohio St. 3d 105, 548 N.E.2d 217 (1989). The Ohio Supreme Court stated that where majority or controlling shareholders in a close corporation breach their heightened Žduciary duty to minority shareholders by utilizing their majority control of the corporation to their own advantage, without providing minority shareholders with an equal opportunity to beneŽt, such breach, absent any legitimate business purpose, is actionable. Crosby at page 221. 2. As a Director. O.R.C. § 1701.59 sets forth the authority and duties of corporate directors, the stan- dard of care required of them and the defenses avail- able to them. Subsection (B) states: (B) A director shall perform the director’s duties as a director, including the duties as a member of any committee of the directors upon which the director may serve, in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. A director serving on a committee of directors is acting as a director. Subsection (F) sets forth to whom the director owes the obligations: (F) For purposes of this section, a director, in determining what the director reasonably believes to be in the best interests of the corporation, shall consider the interests of the corporation’s share- holders and, in the director’s discretion, may consider any of the following: (1) The interests of the corporation’s employees, suppliers, creditors, and customers; (2) The economy of the state and nation; (3) Community and societal considerations; (4) The long-term as well as short-term interests of the corporation and its shareholders, includ- ing the possibility that these interests may be best served by the continued independence of the corporation. 3. As an Ocer or Manager. If the trust Žduciary as- sumes the duties of a corporate ocer or a manager of a limited liability company the trustee may also owe duties to the business entity itself. On February 24, 2016 the Ohio House of Representatives passed Senate Bill 181. The Act is eective July 6, 2016. The Act adds sections 1701.641 and 1705.292 to the Ohio statutes. These provisions exclusively delineate the duties an ocer owes to a corporation and a manager owes to a limited liability company. For an example of how another state’s court has interpreted a trustee’s duties for its entity level actions, see Rol- lins v. Rollins, 329 Ga.App. 768 (Ga.App. 2014), 766 S.E.2d 162. DIRECTED TRUSTS. A directed trust is a trust that removes one or more powers or discretions traditionally held by the trustee and vests that power or discretion in a person as either a special trustee or not a trustee at all. The power or discretion can relate to invest- ment decisions, management decisions, distribu- PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 222 K 2016 Thomson Reuters
- 45. tion decisions orany other decision aecting the administration of the trust. In general a directed trust is often deŽned as a trust in which the trust instrument itself instructs the trustee to make investment decisions as directed by a person named in the trust agreement instrument. This practice was codiŽed in 1986 in Chapter 33, Title 12 of Del- aware Code. The Ohio Trust Code speciŽcally allows “other persons” to direct the trustee and they will be considered a Žduciary except to the extent other- wise provided by the terms of the trust. The holder of a power to direct is liable for any loss that results from a breach of a Žduciary duty. OTC § 5808.08 (D). Protection for the Trustee. OTC § 5815.25 provides a trustee following the orders of a third- party greater protection than the provisions of the UTC. The Report on H. B. 416 states: “A signiŽcant dierence between UTC § 808(b) and § 5815.25 [referenced in § 5808.08(B)] is that the UTC provision does not protect a trustee who follows directions if the act the trustee is directed to perform ‘is manifestly contrary to the terms the trust or the trustee knows the attempted exercise would consti- tute a serious breach of a Žduciary duty that the person holding the power owes to the beneŽciaries of the trust.’ Section 5815.25, like RC § 1339.43, includes no such limitation on the protection aorded a trustee who follows directions from one with the authority to direct.” Unless the governing instrument provides other- wise, the advisor is a Žduciary. The particular advi- sor language included in the trust instrument depends upon the purpose for which the trust is created and the reason why the advisor is appointed. There are innumerable reasons why set- tlors create directed trusts and it would be impos- sible to include all of the language used over the years creating trusts with trust advisors. The most frequently used terms are: a. Trust Advisor—a trust advisor is generally a third party whose responsibility is to advise the trustee with respect to discretionary distributions to the ben- eŽciaries as well as with certain limited investment options. b. Trust Protector—a trust protector is generally a third party that holds powers a trustee does not pos- sess such as the ability to remove the trustee, amend trust terms or change beneŽciaries. Trust protectors are often given the power to terminate a trust and to order the distribution of its assets. Some trust protectors are given the authority to grant general powers of appointment to named beneŽciaries. c. Investment Advisor or Committee d. Distribution Advisor or Committee Consent Advisor or Directed Advisor? The terms of the trust instrument will require the trustee to either follow the express directions of the advisor or merely to seek the consent of the advisor before taking action. The document should clearly reect the default if the trustee seeks the consent of the advisor and the advisor fails to respond. Is it still incumbent upon the trustee to make recom- mendations to an advisor when the document expressly mandates that the trustee follow the directions of the advisor? Protection for the Trust Protector. What is the liability of a trust protector for failing to moni- tor and adjust the actions of the trustee? In 2013 the Court of Appeals of Missouri, Southern District, First Division discussed the liability of a trust protector for failing to replace an errant trustee as well as exercise other duties imposed upon him by the trust instrument. Robert T. McLean Irrevocable Trust U/A/D March 31, 1999 v. Ponder, 418 S.W. 3d 482 (Mo. App. S.D. 2013). Liability for Actions of a Cotrustee. OTC § 5807.03 discusses the liability of cotrustees. Subsection (E) states that a trustee may delegate to a co-trustee duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances. Subsection (G) provides that each trustee shall exercise reasonable care to prevent a cotrustee from committing a serious breach of trust and to compel a cotrustee to redress a serious breach of trust. A trustee is not required to exercise reasonable care of that nature under this division and a trustee is not liable for resulting losses, when section 5815.25 of the Revised Code is applicable or there is more than one other trustee and the other trustees act by majority vote. Subsec- tion (H) provides that a dissenting trustee who joins in an action at the direction of the majority of the trustees and who notiŽed any cotrustee of the dissent at or before the time of the action is not li- able for the action. PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 223K 2016 Thomson Reuters
- 46. A recent casedecided by the Delaware Court of Chancery illustrates the risks of being a cotrustee. Mennen v. Wilmington Trust Company et al., Del. Ch. No. 8432-ML, 2015 WL 1897828. ADMINISTRATIVE FIDUCIARY. H.B. 479 enacted in 2013 created the Ohio Legacy Trust. A portion of that Act amended O.R.C. § 5815.25 in order to introduce the term “administra- tive Žduciary.” The Act provided that if an instru- ment or other applicable written agreement de- scribes, appoints or directs a Žduciary to handle only the administrative duties and responsibilities of a trust, that administrative Žduciary does not have any duties, responsibilities or liabilities to the trust beneŽciaries or to other persons interested in a trust except for those administrative duties and responsi- bilities speciŽcally described in the instrument or agreement. An administrative Žduciary is relieved from any obligation to perform investment reviews and make recommendations with respect to any investments to the extent the grantor, an advisory or investment committee, or one or more other persons have authority to direct acquisition, disposition or reten- tion of any investment. These provisions do not ap- ply to the extent that the instrument under which an administrative Žduciary acts contains provisions that are inconsistent with the statute. PROTECTION THROUGH THE CONSENTS OF THE BENEFICIARIES. OTC § 5810.09 releases a trustee from liability to a beneŽciary for breach of trust if the beneŽciary or the beneŽciary’s representative consented to the conduct constituting the breach, released the trustee from liability for the breach or ratiŽed the transac- tion constituting the breach unless the consent was induced by improper conduct. SEEKING JUDICIAL GUIDANCE. A trustee can always seek a court’s direction as to any matter involving the trust’s administration, including a request for instructions and an action to declare rights. OTC § 5802.01(C) REMEDIES. ORC §§ 5810.01 deŽnes the judicial remedies for a breach of trust. LIABILITY TO BENEFICIARIES FOR BREACH. A trustee who commits a breach of trust is liable to the beneŽciaries aected for the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred. OTC § 5810.02 ENFORCEABILITY OF EXCULPATORY TRUST TERM. A term of a trust relieving a trustee of liability for breach of trust is unenforceable to the extent that it relieves the trustee of liability for breach of trust committed in bad faith or with reckless indif- ference to the purposes of the trust or the interests of the beneŽciaries or was inserted as the result of an abuse by the trustee of a Žduciary or conŽdential relationship to the settlor. OTC § 5810.08 Comments to Section 1008 of the Uniform Trust Code on the exculpation of a trustee. Subsection (b) of the UTC was not adopted in Ohio. Subsection (b) responds to the danger that the insertion of such a clause by the Žduciary or its agent may have been undisclosed or inadequately understood by the settlor. To overcome the pre- sumption of abuse in subsection (b) the trustee must establish that the clause was fair and that its existence and contents were adequately com- municated to the settlor. In determining whether the clause was fair, the court may wish to examine: 1. the extent of a prior relationship between the settlor and trustee; 2. whether the settlor received independent advice; 3. the sophistication of the set- tlor with respect to business and Žduciary matters; 4. the trustee’s reasons for inserting the clause; and, 5. the scope of the particular provision inserted. The requirements of subsection (b) are satisŽed if the settlor was represented by independent counsel. If the settlor was represented by indepen- dent counsel, the settlor’s attorney is considered the drafter of the instrument even if the attorney used the trustee’s form. Because the settlor’s at- torney is an agent of the settlor, disclosure of an exculpatory term to the settlor’s attorney is disclo- sure to the settlor. The Report on H. B. 416 states: “under UTC sec- tion 1008(b) if an exculpatory clause was drafted or caused to be drafted by the trustee, it is invalid un- PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 224 K 2016 Thomson Reuters
- 47. less the trusteeproves that it is fair under the cir- cumstances and that its existence and contents were adequately communicated to the settlor. This provision is omitted from OTC section 5810.08” MATERIAL PURPOSES. The trust instrument should clearly and ex- pressly state the material purposes for which the settlor is creating the trust arrangement. The plan- ner should consider the use of a separate addendum to the instrument that lists (often in the settlor’s own words) what the settlor considers are the ma- terial purposes for the trust arrangement and initials each purpose. A court will have greater guidance in the future if and when the trustee or the beneŽciaries attempt to deviate from these purposes. For example, OTC § 5804.11(B) states that a noncharitable irrevocable trust may be terminated if the court concludes the continuance of the trust is not necessary to achieve any mate- rial purpose of the trust. RESTRICTING SUBSEQUENT TRUST MODIFICATIONS AND CHALLENGES. If the settlor is the sole client, he may not wish to have any subsequent modiŽcations to the inter- pretation or the terms of the trust. OTC § 5801.04 (B) states that the terms of a trust prevail over any provision of Chapters 5801 to 5811 except for enumerated provisions. The restrictions imposed by the settlor often include the following forms: a. Use of in terrorem clauses either relating to the initial validity of the trust instrument or to the subsequent administration of the trust or both. b. Mandatory mediation or arbitration clauses c. Restricting changes in the choice of law and situs of the trust d. Opting out of— a. decanting (§ 5808.18) b. directed trusts c. trust protectors and advisors d. nonjudicial settlement agreements e. limiting the authority of a trustee to delegate These provisions should be discussed with every client as part of any planning and especially for plans that include closely-held businesses. TAX PROVISIONS. a. Income Taxation. i. Grantor vs. Nongrantor Status a. Nongrantor Trusts i. Simple Trusts IRC § 651 provides that in the case of any trust the terms of which provide that all of its income is required to be distributed currently, and do not provide that any amounts are to be paid, permanently set aside, or used for the purposes speciŽed in section 642(c) (relating to deduction for charitable, etc., purposes), there shall be allowed as a deduction in computing the taxable income of the trust the amount of the income for the taxable year which is required to be distributed currently. ii. Complex Trusts IRC § 661 provides that in any taxable year there shall be allowed as a deduction in computing the taxable income of a trust (other than a trust to which subpart B applies), the sum of any amount of income for such taxable year required to be distributed currently (including any amount required to be distrib- uted which may be paid out of income or corpus to the extent such amount is paid out of income for such taxable year) and any other amounts properly paid or credited or required to be distributed for such taxable year, but such deduction shall not exceed the distribut- able net income of the estate or trust. b. Grantor Trusts i. Settlor as grantor IRC §§ 671 to 677 set forth when there shall be included in computing the taxable income and credits of the grantor those items of income, deductions, and credits against tax of the trust which are attributable to that por- tion of the trust to the extent that such items would be taken into account under Chapter 1 in computing taxable income or credits against the tax of an individual. ii. Third Party as grantor IRC § 678 states that a person other than the grantor shall be treated as the owner of any portion of a trust with respect to which: (i) such person has a power exercisable solely by himself to vest the corpus or the income there- from in himself, or (ii) such person has previ- ously partially released or otherwise modiŽed such a power and after the release or modiŽca- tion retains such control as would, within the principles of sections 671 to 677, inclusive, subject the grantor of a trust to treatment as the owner thereof. ii. S Corporation Stock The Internal Revenue Code permits Žve kinds of trusts to own S corporation stock, these being: E Voting trusts (§ 1361(c)(2)(A)(iv)) E Grantor trusts (§ 1361(c)(2)(A)(i)) E Testamentary trusts (§ 1361(c)(2)(A)(ii) and (iii)) E QualiŽed subchapter S trusts (§ 1361(d)) PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 225K 2016 Thomson Reuters
- 48. E Electing smallbusiness trusts (§ 1361(e)) iii. Section 1411 For taxable years beginning after December 31, 2012, net investment income in excess of certain thresholds is subject to a 3.8% tax. IRC section 1411(a)(2) imposes a 3.8% tax on certain trusts. The tax is imposed on the lesser of— (A) the net investment income for such taxable year, or (B) the excess (if any) of— (i) the adjusted gross income (as deŽned in section 67(e)) for such taxable year, over (ii) the dollar amount at which the highest tax bracket in section 1 (e) begins for such taxable year. iv. State Income Taxes The Ohio income tax is imposed on the trust’s mod- iŽed Ohio taxable income. Amended Substitute House Bill 66, 126th General Assembly, made per- manent Ohio’s income tax on all trusts that meet one of the following requirements: E The trust earns or receives Ohio source income (income apportioned to Ohio or allocated to Ohio); or E The trust otherwise has nexus with or in Ohio under the Constitution of the United States. The following types of trusts are excluded from Žl- ing Ohio form IT 1041 as per R.C. section 5747.02(E): E Grantor trusts E Charitable remainder trusts E Retirement trusts v. Basis Adjustments IRC § 1014 provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be the fair market value of the property at the date of the decedent’s death. The following shall be considered to have been acquired from or to have passed from the decedent: E Property acquired by bequest, devise, or inher- itance, or by the decedent’s estate from the dece- dent; E Property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent, with the right reserved to the decedent at all times before his death to revoke the trust; E Property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent with the right reserved to the decedent at all times before his death to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust; and E Property passing without full and adequate consideration under a general power of appoint- ment exercised by the decedent by will. b. Estate Taxation i. Inclusion The gross estate includes all property in which the decedent had an interest at the time of his death. IRC § 2031. When a decedent retains some control over gifts of property made during his or her lifetime the property may be added back to the gross estate. Transfers that are subject to this rule include: E gifts in which the decedent retains a life estate, or the right to the income, possession, or enjoy- ment of the property or the right to name who will enjoy the property. IRC § 2036; E gifts in which the decedent retains a right to a reversionary interest that exceeds 5% of the value of the property that has been transferred. IRC 2037(a); and E gifts in which the decedent holds a power to alter, amend, revoke or terminate the gift. IRC § 2038. On March 17, 2016 the Tax Court, in a memoran- dum decision, opined on the applicability of IRC § 2036. Estate of Holliday v. Commissioner of Internal Revenue, 031716 FEDTAX, 8143-13, T.C. Memo. 2016-51 ii. Liquidity with which to Pay Estate Tax liability a. IRC § 303 If a corporation makes a distribution of property in redemption of its stock that has been included in a deceased shareholder’s gross estate, the transaction will qualify as an exchange if the amount of the distribution is not greater than the sum total of all federal estate taxes and fu- neral and administration expenses allowable as deductions. IRC § 303(a). To qualify the transac- tion must satisfy the following conditions: E The corporation must redeem the stock fol- lowing the shareholder’s death and generally within 3 years and 90 days after the estate tax return is due; and E The value of the deceased shareholder’s stock must exceed 35% of the gross estate, af- ter deductions for allowable funeral and administration expenses and losses. b. IRC § 6166 If an estate includes a farm or closely held busi- ness with a value exceeding 35% of the adjusted gross estate, the executor may elect to pay the estate tax in as many as 10 annual installments, following a deferral period of as long as 5 years. IRC § 6166(a)(1). The amount of tax deferred is limited to the tax attributable to the business interest. A special rate of interest is available for a portion of tax deferred. IRC § 6601(j). iii. Eligibility for Marital Deduction An unlimited estate tax marital deduction is avail- able to the estate of an individual who is married at the time of his or her death. IRC § 2056(a). The marital deduction is allowed for the value of all property included in the gross estate that passes to the decedents surviving spouse in a manner that qualiŽes for the deduction. IRC § 2056(a) and § 2056(b). PASSING THE BATON TO THE NEXT GENERATION: LAW PRACTICE SUCCESSION PLANNING By William J. McGraw, III, Esq. PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 226 K 2016 Thomson Reuters
- 49. Dungan & LeFevreCo., LPA Troy, Ohio Member, PLJO Editorial Advisory Board and Sarah G. Worley, Esq. Dungan & LeFevre Co., LPA Troy, Ohio Are you looking to retire or to cut back on your hours? Do you have a plan in the event you were to be diagnosed with a serious illness or if you need to take signiŽcant time o to care for a loved one? Every attorney needs a succession plan to address these issues (regardless of age). The American Bar Association Lawyer Demo- graphics Survey reports that 34% of lawyers in the United States are age 55 and older, which is up from 25% in 2000.1 Furthermore, 49% of lawyers are solo practitioners. The statistics certainly sup- port the need for succession planning, yet most lawyers are hesitant to implement a plan. The most common concerns we have heard from attorneys are: “I don’t want to take a pay cut to bring in a young lawyer.” “I don’t have time to train a young lawyer.” “I don’t want the young lawyer to leave and take my clients.” This article attempts to dispel these common concerns and to provide suggestions on strategies that have worked in our practice. Concern 1: “I don’t want to take a pay cut to bring in a young lawyer.” If a senior attorney is reluctant to bring in a youn- ger attorney because his or her pay may be cut, the other partners in the Žrm need to encourage the senior attorney through non-traditional forms of compensation, such as compensation for client origination and time spent mentoring the younger attorney. If you are a solo practitioner, you obvi- ously do not have the ability to rely on other partners to provide you with a non-traditional form of compensation. While the thought of having your income reduced (especially if you are close to retirement) is scary, bringing on a younger attorney does not necessar- ily have to mean that your income will be reduced. For example, we have found that hiring another at- torney results in client work being done in a timelier manner, which results in bills being sent out quicker. Furthermore, when there is a younger attorney to help complete the current client work, the senior attorney has more time to generate ad- ditional business through networking, speaking engagements, etc. . . Concern 2: “I don’t have time to train a young lawyer.” There is no doubt that bringing in a young lawyer requires time for training, and there is never enough time in the day. Unfortunately, we do not have any magic tips that drastically reduce the amount of training time because it is essential that the senior attorney make the time to be available for questions (such as those relating to the applica- tion of the law, client relationships, and business development). If training a lawyer fresh out of law school sounds like pure torture to you, you should consider hiring an attorney with a few years of experience. This experience will likely come with an increased salary demand, but an attorney with a few years of experience should be able to handle some matters independently; should have some experience in networking and business development; and may even have a small book of business to bring with them to your Žrm. The word “training” may conjure up images of a teacher at the blackboard with a student. While some attorneys may Žnd that method eective, we have taken a more collaborative approach to our training. Sarah is included in all of Bill’s appointments. Through these meetings, Sarah is able to see how Bill handles those particular clients and to hear the manner in which he explains concepts to them. This face-to-face time with the client also gives the client the opportunity to become comfortable with Sarah, which is the goal of any succession plan. If the client meeting is routine, Sarah just takes the ball and runs with it. However, if the client meeting presents a unique issue, we will discuss the best manner in which to proceed. Bill does not say “it is my way or the highway”; rather, Bill listens and considers Sarah’s ideas. We then weigh PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 227K 2016 Thomson Reuters
- 50. the pros andcons of the dierent ideas. It is through this collaboration and brainstorming pro- cess that Sarah is able to learn why some courses of action are better than others. Once we decide on the appropriate course of ac- tion, Sarah prepares the pertinent documents. Bill then reviews what Sarah has prepared and recom- mends any changes. Bill actually gives the changes to Sarah. He does not just have the legal assistant make the changes. This is so Sarah can actually see the proposed changes and ask any questions if she does not understand why the changes were proposed. This is crucial to making sure the young attorney learns from his or her mistakes. This process is our idea of training. Most of you are asking “who really has time for all of this?” However, we can tell you that our method has been successful. Some of our biggest clients now call Sarah directly because they are comfortable that she can handle the matter competently and eciently. This is the goal of any succession plan: making sure the client is comfortable with the younger attorney so that the Žrm can retain the client after you leave the practice. Concern 3: “I don’t want the young lawyer to leave and take my clients.” Under our ethics rules, you cannot require that the young lawyer enter into a non-compete agreement restricting the lawyer from taking your clients. However, if you Žnd the right successor attorney, and he or she Žts in with the Žrm environment, you will not have to worry about the young attorney leaving. There are countless ways to Žnd a young lawyer, including through personal networking; the young lawyer division of the local bar association; profes- sional practice groups; law schools; bar association postings; or through social media (such as LinkedIn). But just because the attorney is youn- ger than you, does not mean he or she will succeed in your practice area or be the right Žt for your Žrm. When looking for the ideal successor attorney, you need to determine the types of cases and clients you routinely encounter. Do you have a lot of long- term clients or one-time clients? What is the personality of most of your clients? What personal- ity traits have helped you to succeed in your practice area? Once you evaluate your own practice area and traits, you should prepare interview questions that touch on whether or not the interviewee has the skills that are most important to you. Here are some skills that we Žnd important in our law practice, along with corresponding interview questions2 : E Self-Management Skills E Including the ability to prioritize items and manage time eciently; has a clear sense of ones strengths and areas in need of development and experience. E Interview Questions: E What are three words your co-workers would use to describe you? E What would your biggest critic say about you? E Why should we not hire you? E People Management Skills E Understands the strengths and weak- nesses of team members; gives timely and eective feedback and models positive leadership behaviors; seeks ways to im- prove the work environment. E Interview Questions: E Who was your favorite manager and why? E What are the qualities of a good leader? E Should a leader be feared or liked? E Have you ever been on a team where a member did not pull his or her own weight? How did you handle the situa- tion? E Case Management Skills E Including the ability to create the overall strategy for a client matter; determining PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 228 K 2016 Thomson Reuters
- 51. corresponding assignments andtimelines; and delegating eectively. E Interview Questions: E What techniques do you use to keep your- self organized? E Do you have problems delegating tasks to others? E Client Relationship Skills E Knows how to build strong relationships and trust with clients; manages a client’s expectations throughout the course of the engagement; understands the dierent needs of clients and communicates ef- fectively with them. E Interview Questions: E Describe your prior experience with han- dling customer or client matters? E Have you ever handled a customer or cli- ent complaint? If so, how did you handle the situation? Did the customer or client return? We recommend that you have multiple meetings (in dierent environments) with the potential suc- cessor prior to hiring him or her. For example, you may want to have your Žrst interview as a one-on- one meeting at your oce; a second interview over a meal (which provides a more casual atmosphere and you can conŽrm that he or she has the ap- propriate social graces); and a third interview with other attorneys at the Žrm (and the opportunity to meet the sta). Through these dierent events, you get the opportunity to learn a lot about the potential successor and determine if his or her personality is the right Žt with the attorneys and sta. Once you have found the successor attorney, the next step is to develop a positive work environment. While as young lawyers we all have to “pay our dues,” repeatedly having to do grunt work does not usually lead to job satisfaction. We would recom- mend assigning a variety of dierent projects, as well as allowing the young attorney to participate in client meetings. Common sense is really your guide: if you dislike certain projects, chances are the young attorney does too. Just be sure to mix in some good projects with the bad. We cannot guarantee that if you follow our advice you will never have an attorney leave (as there are so many dierent variables, such as the desire to be closer to family, a spouse’s change of jobs, etc. . .). However, it is our hope that this article provided you with some ideas that you can use in your quest for Žnding a successor attorney. For ad- ditional information see: “Financial Aspects of Succession Planning,” May/ June 2011 Law Practice Magazine, Volume 37, Number 3 by Stephen Mabey and Karen MacKay, available at http://www.americanbar.org/publicatio ns/law practice magazine/2011/may june/Žnan cial aspects of succession planning.html. “Closing a Solo Practice: An Exit To-Do List,” May/June 2011 Law Practice Magazine, Volume 37, Number 3, by Sheila Blackford and Peter Roberts, available at http://www.americanbar.org/p ublications/law practice magazine/2011/may ju ne/closing a solo practice an exit to-do lis t.html. “Five Questions to Ask About Your Firm’s Suc- cession Readiness,” May/June 2011 Law Practice Magazine, Volume 37, Number 3, by Tom Grella, available at: http://www.americanbar.org/publicatio ns/law practice magazine/2011/may june/Žve questions to ask about your Žrms successi on readiness.html. “A New Direction: Co-Founders Address the ‘What-If’ Scenario,” May/June 2011 Law Practice Magazine, Volume 37, Number 3, by Steven T. Taylor, available at: http://www.americanbar.org/p ublications/law practice magazine/2011/may ju ne/co-founders address the what-if scenario.h tml. “Thinking Ahead: Moving Young Lawyers into the Leadership Pipeline,” May/June 2011 Law Practice Magazine, Volume 37, Number 3, by Ste- ven T. Taylor, available at: http://www.americanba r.org/publications/law practice magazine/2011/m ay june/moving young lawyers into the lea dership pipeline.html. “Initiating Client Succession in Your Law Firm,” PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 229K 2016 Thomson Reuters
- 52. by Eric Seeger,Altman Weil, Inc., available at ww w.altmanweil.com. “Planning for Succession Planning,” by Alan R. Olson, Altman Weil, Inc., available at www.altman weil.com. “What Should Law Firms Do About Succession Planning?” An Altman Weil Commentary on results from the 2013 Law Firms in Transition Survey,” by James D. Cotterman, available at www.altmanwei l.com. ENDNOTES: 1 2012 American Bar Association: Lawyer Demo- graphics, available at: http://www.americanbar.org/ resources for lawyers/profession statistics.h tml. 2For additional information, see “A Short Course in Succession Planning,” May/June 2011 Law Practice Magazine, Volume 37, Number 3, by Marcia Pennington Shannon, available at: http://w ww.americanbar.org/publications/law practice m agazine/2011/may june/a short course in su ccession planning.html. CASE SUMMARIES Fugate-Walton v. Walton Headnote: Claims Citation: 2016-Ohio-1175 (5th Dist.) A couple had a prenuptial agreement promising $100,000 to the wife on death of the husband. After he died, the wife’s attorney wrote to the attorney for the soon to be appointed executor noting the agreement and that it “may be at odds with the terms of the will.” A formal claim was later Žled but rejected as outside the six months claim period. Suit was brought on the rejected claim, with sum- mary judgment granted for the executor and af- Žrmed on appeal. The letter containing the quoted language, even if sucient for a claim and properly sent to the executor’s attorney rather than to the executor, was sent before the appointment of the executor and thus was not valid as presentment of a claim. This is one of a series of cases where claims have been Žled prematurely. Should the statute be amended to permit pre-appointment Žling? Only if the recipient is the one later appointed as execu- tor? Should claimants then guess who may be ap- pointed? Should recipients then guess whether they will be appointed? Or is the certainty of the current statute desirable? Estate of Thallman v. Thallman Headnote: Trust administration and termina- tion Citation: 2016-Ohio-992 (3d Dist.) Husband and wife each had trusts, the principal asset of each being his or her interest in the family farm. Wife died and her trust became irrevocable and was held for husband. Later husband died, and both trusts became distributable equally to their Žve children, except that one son had died leaving children to receive his 1/5th share. Those grandchil- dren sued the trustees (who were three of the chil- dren) blindly, and initiated discovery to Žnd causes on which to sue. The trustees urged that they were required to supply information to the grandchildren on only the period after the husband’s second death, but provided full information on the period after his death and also much on the earlier period too. The trial court ultimately halted the Žshing expe- dition of the grandchildren and ordered them to pay counsel fees incurred by the trustees in re- sponding to it, and the appellate court armed (subject to disallowing certain of the expenses). Both courts noted the contested issue of entitle- ment to information for the period when the grandchildren were only remainder beneŽciaries and not current beneŽciaries; the trial court held that they were not entitled to information then, and the appellate court declined to decide the issue because it found that sucient information had been furnished to them. The appellate court quoted the NCCUSL Com- ment to RC 5808.13 and the cited deŽnitions of ben- eŽciary in RC 5801.01 in framing that issue. However, neither court noted RC 5808.13(G), providing that during the life of the settlor of a re- vocable trust the trustee’s duties are due only to the settlor, which would bar the grandchildren from information on the husband’s trust for the period before his death. PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 230 K 2016 Thomson Reuters
- 53. Schwartz v. Tedrick Headnote:Trust contest Citation: 2016-Ohio-1218 (8th Dist.) Decedent left a second wife and four children by his Žrst marriage. He signed a trust that provided substantial equal bequests to each of the children and left the residue in lifetime trust for his wife with remainder to the children. Several weeks later he amended the Trust to delete the children’s bequests and increase the fund to be held for the wife. The facts suggested a case of undue inuence by the wife, which the trial court found and appel- late court armed. The drafting attorney did not testify at trial, and the trial court denied wife’s mo- tion to admit his deposition transcript in lieu of live testimony, which the appellate court also armed. The wife was also removed as trustee by the trial court; the appellate court held that order to be Žnal and appealable, but also armed it. On undue inuence see Kolb, How to Identify and Prove Undue Inuence, 25 PLJO 242 (July/Aug 2015). Black v. Watson Headnote: Wills and contests Citation: 2016-Ohio-1470 (8th Dist.) Decedent’s will left all to his second wife, disin- heriting his daughter by a prior marriage. She contested the will, among other reasons because one of the witnesses was the scrivener’s legal secre- tary whose notarial commission had expired. The appellate court armed grant of summary judg- ment to the wife, noting that the secretary did not sign as a notary and that a witnesses is not required to be a notary. We trouble you with this case only because this argument is so, well, you name it. In re Burton Headnote: Marriage Citation: 2016-Ohio-2683 I(12th Dist.) Decedent left Žve children, who apparently were not also children of the surviving wife. After she was appointed administrator a child moved for her removal, on two interesting grounds. First, that no record of registration of his authority to marry by the clergyman who performed the marriage was found; both trial and appellate courts held that even if he was not registered, a fact not proven, the marriage would be only voidable directly, not void for purposes of this collateral challenge. Second, that the mother of one of the children was the real wife of the decedent by common law marriage; but another court had already determined there was no common law marriage before the ceremonial mar- riage to the administrator, and there could have been no common law marriage after it because her ceremonial marriage, even if voidable, would not be void so as to permit a common law marriage. Key Bank N. A. v. Thalman Headnote: Trust Administration and Termina- tion Citation: 2016-Ohio-2832 (8th Dist.) A trust was held equally for two siblings. The daughter wanted growth for her children, the son wanted income for himself. To accommodate both, the trustee split the trust into two equal trusts. Af- ter both siblings had died and the trust was distributable to their respective families, the ques- tion arose whether each family shared equally in both trusts or each received the greater or lesser share resulting from the split and dierent invest- ment and distribution policies for each separate trust The trustee proposed equal division, so of course the daughter’s family objected. The trial court sustained the trustee’s plan of equal division on summary judgment, but the appellate court re- versed and remanded for trial. The trust was split after the eective date of the Ohio Trust Code, and the court cites RC 5804.l7 as authorizing the split but not any recombination. The split did not change the interests of the beneŽ- ciaries, but the recombination would reduce the Žnal distribution to the daughter’s family by almost $250,000. In re Estate of Brown Headnote: Joint and survivorship accounts Citation: 2016-Ohio-3074 (8th Dist.) PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 231K 2016 Thomson Reuters
- 54. Decedent left hisestate by his will equally to his niece and a family friend. There was about $140,000 in a savings and a checking account titled jointly with survivorship with the niece. The friend was executrix, she included the accounts in the probate inventory and the niece Žled exceptions (she had already been paid the accounts by the bank). The probate court sustained the exceptions (and ulti- mately removed the friend as executrix and denied her fee). The appellate court armed, Žnding that the burden of proof was on the niece-exceptor and she met it as there was simply no evidence of impropriety. The friend argued that the niece was on the accounts only for convenience, but Wright v. Bloom, 69 Ohio St. 3d 596 (1994) blocks that argument. SUBJECT INDEX (Rolling 12-month index covering May 2015 to April 2016) Administrators In re Estate of Amoroso, 2015-Ohio-3352, Sept/ Oct 2015 Antilapse Statute Castillo v. Ott, 2015-Ohio-905, May/June 2015 Appeal Deadline In re Guardianship of Mull, 2015-Ohio-5440, Jan/ Feb 2016 Attorney fees Jakubs v. Borally, 2015-Ohio-2696, July/Aug 2015 BeneŽciary Designations Vary, Planning with BeneŽciary Designations, Jan/Feb 2016 Charitable deductions Wheatley, Donating Art and Tangible Personal Property—Obtaining the Charitable Income Tax Deduction, July/Aug 2015 Charities Swartz, Private Foundations—Are They Worth the Eort, Nov/Dec 2015 Vanover, Unwinding or Restructuring the Corpo- rate Family Foundation, Nov/Dec 2015 Shumaker and Mlakar, Charitable Giving with Business Interests and Unique (Complex) Assets, Jan/Feb 2016 Claims Huth v. Kus, 2015-Ohio-3457, Sept/Oct 2015 Robertson, Presenting a Claim in Wilson v. Lawrence, March/April 2016 Brucken, Where the Claims Period is a Full Four Years, March/April 2016 In re Estate of Bohl, 2016-Ohio-63, March/April 2016 Co-Trustees and Trust Advisers Hindel et al., Interacting with Co-Trustees and Other Third Party Decision Makers, Jan/Feb 2016 Digital Assets Watson, Authorizing Access to Digital Assets by Fiduciaries, March/April 2015 Lenz, Fiduciaries and Digital Assets: Is the Cloud Finally Lifting? Jan/Feb 2016 Disability Marx, Saving for Disabled BeneŽciaries is Easier with ABLE, Sept/Oct 2015 Divorce In re Estate of Humphrey, 2014-Ohio-5859, March/April 2015 Loeb and Jambe, How Estate Planners Can Help Clients Avoid Losing Separate Property Interests in Divorce, Jan/Feb 2016 Domicile Carlin, Home Is Where the Intent Is, March/ April 2015 PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 232 K 2016 Thomson Reuters
- 55. Morrow, New LawPermits Snowbirds to Stay in Ohio Longer, March/April 2015 Drafting Trusts Scott, Gun Trusts, July/Aug 2014 Electronic Wills Gee, Exploring Electronic Will Cases, March/ April 2016 Estate Planning Kirkpatrick, Why Estate Planning Transparency Matter for Young Adults, May/June 2015 Krall, Estate Planning for BeneŽciary Who is a Heroin Addict, July/Aug 2015 Saccogna, Portability: Estate Planning in the New Frontier, July/Aug 2015 Burda, Estate Planning Issues Facing LGBT Clients In a Post-Obergefell World, Nov/Dec 2015 Vaselaney, Estate Planning of the Rich and Famous, Nov/Dec 2015 Ethics Hoheimer, Lawyers Beware: Ethics Opinion Limits Lawyer Conduct in Presenting Seminars to Nonlawyers, Nov/Dec 2015 Executor fee Dauterman, Revisions to the Ohio Executor Fee Statute, July/Aug 2015 Foreign Real Estate Spallino, Advising Clients Who Own (or Who Want to Own) Foreign Real Estate, Jan/Feb 2016 Funeral Millonig, Funerals and Burials: Law and Cus- toms, March/April 2015 Gifts Gabbard v.Estate of Gabbard, 2015-Ohio-2011, July/Aug 2015 Huntington Natl. Bank v. Riversource Life Ins. Co., 2015-Ohio-5600, March/April 2016 Guardianship In re Guardianship of Van Dyke, 2015-Ohio- 4202, Nov/Dec 2015 Meister, New Ohio Guardianship Rules, Jan/Feb 2016 Income Tax Basis Pauloski, How Income Tax Management Is Changing the Face of Estate Planning, Jan/Feb 2016 Incompetency Severing v. Severing, 2015-Ohio-5236, Jan/Feb 2016 Inventory In re Estate of Distelhorst, 2016-Ohio-413, March/April 2016 Joint Trusts Brucken, Why Joint Trusts? March/April 2015 Whitehair, income Tax Planning: Problems with Joint Trusts, Sept/Oct 2015 Swift and Seils, The “Basis” for Using a Joint Trust in Ohio, Jan/Feb 2016 Jurisdiction of Courts Morello v. Ferrucio, 2015-Ohio-1370, May/June 2015 Bayes v. Dornon, 2015-Ohio-3053, Sept/Oct 2015 LLC Operating Agreement Hackenburg v. Zeller, 2015-Ohio-3813, Nov/Dec 2015 Malpractice Ryan v. Huntington Trust, 2015-Ohio-1880, July/ Aug 2015 Medicaid Millonig, Medicaid Estate Recovery Against Life Estate, May/June 2015 PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 233K 2016 Thomson Reuters
- 56. Millonig, Medicaid Residencein Revocable Trust & Transfer, Nov/Dec 2015 Medical Records Slagle, HIPAA, Ohio’s Patient-Physician Privi- lege and Medical Records, March/April 2015 Ohio Income Tax Cunningham v. Testa, 2015-Ohio-2744, Sept/Oct 2015 Mottley and Hoheimer, Onio Income Tax Resi- dency after Cunningham v. Testa, Sept/Oct 2015 Vannatta and Seils, Ohio Bright Line Residency Test, Sept/Oct 2015 Lawrence, Revitalizing the Ohio Income Tax Residency Bright Line, Jan/Feb 2016 Ohio Trust Code Moore, Current Issues under the Ohio Trust Code: The Revocable Trust, July/Aug 2015 Brucken, Ohio Trust Code Amendments Pro- posed, Nov/Dec 2015 Brucken, Who Is a Trust? Nov/Dec 2015 Powers of Appointment Collins v. Hearty Investment Trust, 2015-Ohio- 400, March/April 2015 Portability Saccogna, Final Regulations, March/April 2016 Powers of Attorney Acker, Should We Simply Use the Suggested POA and Directive Forms? May/June 2015 Private Trust Companies Galloway, Proposed Ohio Legislation Would En- able Use of Private Trust Companies, Nov/Dec 2015 Probate administration State ex rel. Fellows v. Everman, 2015-Ohio- 2200, July/Aug 2015 Thakur, Transfer of a Boat Trailer to a Surviv- ing Spouse (Along with the Boat and Motor), July/ Aug 2015 Probate Support Allowance In re Estate of Cvanciger, 2015-Ohio-4318, Nov/ Dec 2015 Carlin, RC 2106.13 is Not Subject to RC 2106.25, Jan/Feb 2016 Reformation of Trusts and Wills Newman, Interpretation and Reformation of Trusts and Wills, March/April 2016 Removal of trustee Fried and McGee, Has it Become Too Easy to Remove a Trustee under Ulinski v. Byers? March/ April 2016 Retirement Plans Browning, Planning with Retirement Funds, May/June 2015 Self-dealing In re Estate of Barry, 2015-Ohio-1203, May/June 2015 Simultaneous Death Davis, Calling for Clarity in Ohio’s Uniform Si- multaneous Death Act, March/April 2015 Standing Papps v. Karras, 2015-Ohio-1055, May/June 2015 Abraitis v. Gallagher, 2015-Ohio-2312, July/Aug 2015 Perkins v. Rieser, 2016-Ohio-728, March/April 2016 Fried v. Abraitis, 2016-Ohio-934, March/April 2016 Trust Administration and Termination Buckley et al., Newcomer v. Natl. City Bank, Guidance for Ohio Trustees, March/April 2015 Buckley et al., Newcomer v. National City Bank Appeal Concludes, May/June 2015 PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 234 K 2016 Thomson Reuters
- 57. Brucken, Do WeShoot the Trustee? Omitting Notices and information, May/June 2015 Graf, Immortalizing the Settlor’s Voice, May/ June 2015 Ogline, Transfer of Fiduciary Responsibility to the Trust Protector, July/Aug 2015 Puhl v. U. S. Bank, 2015-Ohio-2083, July/Aug 2015 Brucken, Can Trusts Really Be Secret? Sept/Oct 2015 Sullivan, Honoring the trust agreement: Puhl v. U.S. Bank, Sept/Oct 2015 Nordloh v. McGuire, 2015-Ohio-4529, Nov.Dec 2015 Newcomer v. Roan, 2016-Ohio-541, March/April 2016 Trust Contest Malemud, Breaking Down a Trust Dispute, March/April 2015 Ferguson and Seils, Keeping the (Potential) Disgruntled BeneŽciary at Bay, May/June 2015 Trust Income Tax Stein, Final IRS Income Tax Regulations on Deducting Bundled Fees, Sept/Oct 2015 Trust Instrument Pitts v. Sibert, 2015-Ohio-3020, Sept/Oct 2015 Unauthorized Practice of Law Ohio State Bar Assn. v. Wishgard LLC, 2015- Ohio-4309, Nov/Dec 2015 Wills and Contests Fried, Ethical Issues With Clients Who Exhibit Diminished Capacity, March/April 2015 Demeraski v. Bailey, 2015-Ohio-2162, July/Aug 2015 Kolb, How to Identify and Prove Undue Inu- ence, July/Aug 2015 Sferra v. Shepherd, 2015-Ohio-2902, Sept/Oct 2015 LEGISLATIVE SCORECARD Keep this Scorecard as a supplement to your 2014 Ohio Probate Code (complete to May 6, 2014) for up- to-date information on probate and trust legislation. Recently enacted Conform Ohio tax law to federal tax law HB 19 E. 4-1-15 Conform executor fee to repeal of Ohio estate tax HB 64 E. 6-30-15 See Dauterman, Technical Corrections Proposed for Ohio Executor Fee Statute, 24 PLJO 177 (Jan/Feb 2014); also 25 PLJO 237 (July/Aug 2015). Waiver of Žrst partial account clariŽed HB 64 E. 6-30-15 Watercraft trailer passing to spouse HB 64 E. 6-30-15 See Thakur, Proposal Authorizing Transfer of a Boat Trailer to a Surviving Spouse (Along with the Boat and Motor), 24 PLJO 146 (Nov/Dec 2013); also 25 PLJO 240 (July/Aug 2015). Conform Ohio tax law to federal tax law SB 2 E. 2-14-16 Adopt Ohio Family Trust Company Act HB 229 E. 9-13-16 See Galloway, Proposed Ohio Legislation Would Enable Use of Private Trust Companies, 26 PLJO 33 (Nov/Dec 2015) Pending Adopt MOLST (medical order life sustaining treat- ment) forms SB 165 Passed Sen- ate 5-4-16 PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 235K 2016 Thomson Reuters
- 58. See Maag, TheDevelopment of POLST to Honor Medical Treatment Goals at End-of-Life, 23 PLJO 13 (Sept/Oct 2012) Authorize beneŽt corporations HB 545 Intro. 5-3-16 Divorce and TOD real estate, inheritance through technology SB 232 Reported by House Judi- ciary Commit- tee 5-24-16 Omnibus probate bill (see OSBA legislation list) HB 432 Passed House 5-18-16 Proposed legislation sponsored by the Ohio State Bar Ass'n, Estate Planning, Trust and Probate Law Section Permit waivers of inventories and accounts Ohio BAR of 10-17-94 See Johnson, An Apologia for Voluntary Inventories and Accounts, 8 PLJO 6 (Sept/Oct 1997); Brucken, Non-Court Administration of Estates Now Available in Over Two-Thirds of the States, 19 PLJO 68 (March/April 2002); Freder- ickson The Inventory and Appraisal: Notice, No Notice or (“Gasp”) No Inventory? That Is the Question, 22 PLJO 161 (March/April 2012); An Allegory 19 PLJO 164 (March/April 2009); Schweller, Waiver of Inventories and Accounts, 23 PLJO 95 (Nov/Dec 2012). Strengthen estate tax apportionment act HB 432 Fall 2005* See Harris, Estate Planning Trust and Probate Law Section Committee Supports Change to Apportionment of Estate Tax, 16 PLJO 50 (Nov./ Dec. 2005). See Vannatta, A Call for Help to the Ohio General Assembly: The Ohio Estate Tax Apportionment Statute Needs ModiŽcation, 19 PLJO 218 (July/ Aug 2009). Facilitate deposit of wills with court HB 432 Fall 2012* See Ruchman, Production of Wills, 23 PLJO 48 (Nov/Dec 2012). SimpliŽcation of sale of real estate by guardians HB 432 Spring 2013* See Thakur, Proposal: Authorizing the Sale of Real Property by a Guardian Through use of Consents, 23 No. 5 Ohio Prob. L.J. NL 2 (May/June 2013). Divorce and TOD real estate, inheritance through technology SB 232 Spring 2013* See Meredith, Changes to the Transfer on Death Real Estate Statutes in the Event of Divorce, Dissolution or Annulment, 23 No. 5 Ohio Prob. L.J. NL 3 (May/June 2013). Inheritance through artiŽcial reproduction technology SB 232 Spring 2013* See Rectenwald, The Inheritance Rights of “ART” Children, 23 No. 5 Ohio Prob. L.J. NL 4 (May/June 2013). Authorize arbitration of trust disputes Spring 2014* See Clark, Required Arbitration of Trust Disputes: Enforcing Settlor's Intent, 24 No. 6 Ohio Prob. L.J. NL 2 (Jul/Aug 2014). Residence in revocable trust qualifying for Medicaid Fall 2014* PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 236 K 2016 Thomson Reuters
- 59. See Browning, RecentCourt Decision Punishes Family Who Titled Home in Revocable Trust, 23 PLJO 207 (May/June 2013). Clarify Uniform Simultaneous Death Act HB 432 Spring 2015* See Davis and Haight, Calling for Clarity in Ohio’s Uniform Simultaneous Death Act, 25 PLJO 181 (March/April 2015). Updating Ohio Trust Code HB 432 Fall 2015* See Brucken, Ohio Trust Code Amendments Proposed, 26 PLJO 35 (Nov/Dec 2015). Updating Ohio Uniform Principal and Income Act HB 432 Fall 2015* See Evans, Changes to the Uniform Principal and Income Act Currently Under Consideration for Adoption in Ohio, 24 PLJO 226 (March/April 2014). Permitting Deferral of UTMA gifts to age 25 HB 432 Fall 2015* See Meehan, Ohio Transfers to Minors Act: Should Distributions Be Delayed Beyond Age 21? 25 PLJO 71 (Nov/Dec 2014). Enact Revised Uniform Fiduciary Access to Digital Assets Act Spring 2016* See Watson, Digital Assets and Fiduciaries, Help Is On the Way!, 26 PLJO 179 (May/June 2016) Amend Ohio Uniform Power of Attorney Act for digital assets Spring 2016* See Davis, Spiders from Mars: UPOAA, UFADAA and Ziggy Stardust, 26 PLJO 182 (May/June 2016) Clarify anti-lapse statute application to class gifts Spring 2016* See Layman, Ohio’s Anti-Lapse Statute and the Proposed Statutory Response to Castillo v. Ott, 26 PLJO 197 (May/June 2016) Predeath probate of will and trust Spring 2016* See Lehman, Wills and Trusts: Updating Ohio’s Pre-Mortem Validation Law, 26 PLJO 191 (May/ June 2016) *Full text and explanation given in EPTPL Section Report to OSBA Council of Delegates, posted on OSBA website under “Publications/Special Reports/Council of Delegates.” For the full text of pending bills and enacted laws, and for bill analyses and Žscal notes of the Legislative Service Commission, see the Web site of the General Assembly: http://www.legislature. state.oh.us/search.cfm. Information may also be obtained from the West Ohio Legislative Service, and from our Customer Service Department at 800-362-4500. Copies of legislation prior to publi- cation in OLS are available from Customer Service at nominal cost. PROBATE LAW JOURNAL OF OHIO MAY/JUNE 2016 | VOLUME 26 | ISSUE 5 237K 2016 Thomson Reuters
- 60. EDITOR-IN-CHIEF Robert M. Brucken,Esq. Retired Partner, Baker & Hostetler LLP, Cleveland ADVISORY BOARD Angela G. Carlin, Esq. Weston Hurd, LLP, Cleveland J. Michael Cooney, Esq. Dinsmore & Shohl, LLP, Cincinnati Richard E. Davis II, Esq. Krugliak, Wilkins, Griths & Dougherty Co., LPA, Canton John F. Furniss, Esq. Bricker & Eckler, Columbus William R. Graf, Esq. Graf Stiebel & Coyne, Cincinnati Joanne E. Hindel, Esq. Fifth Third Bank, Northeastern Ohio, Cleveland Daniel J. Hoheimer, Esq. Taft, Stettinius & Hollister, LLP, Cincinnati Roy A. Krall, Esq. Cavitch, Familo & Durkin LPA, Akron/Cleveland Patricia D. Laub, Esq. Frost Brown Todd, LLC, Cincinnati William J. McGraw, III, Esq. Dungan & Lefevre LPA, Troy Karen M. Moore, Esq. Bricker & Eckler, Columbus Alan Newman, Esq. Professor of Law, University of Akron, Akron Michael A. Ogline, Esq. Geiger, Teeple, Smith & Hahn, LLP, Alliance Kevin G. Robertson, Esq. Baker & Hostetler LLP, Cleveland Mark E. Vannatta, Esq. Vorys, Sater, Seymour & Pease, LLP, Columbus PUBLICATION EDITOR Megan Arneson, Esq. PROBATE LAW JOURNAL OF OHIOMAY/JUNE 2016 | VOLUME 26 | ISSUE 5 238 K 2016 Thomson Reuters