Probate & Property - November/December 2021, Vol. 35, No. 6

COMMUNITY PROPERTY TRUSTS

DELAWARE STATUTORY TRUSTS

ASYMMETRICAL CONSERVATORSHIP LITIGATION

VOL 35, NO 6 NOV/DEC 2021

A PUBLICATION OF THE AMERICAN BAR ASSOCIATION | REAL PROPERTY, TRUST AND ESTATE LAW SECTION

LIFESAVERS FOR ADVERSE TAX REFORM Opportunity Zone Investing and Other Options

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WILLS IN THE 21ST CENTURY: TOWARDS SENSIBLE APPLICATION OF FORMALITIES THE UNIFORM RELOCATION OF Tuesday, July 14, 2020 EASEMENTS ACT 12:30-1:30 pm ET

Tuesday,CRAWFORD, NovemberElisabeth 9, 2021 12:30-1:30 BRIDGET Haub School of pm LawET NAOMI George Washington JOHN A.CAHN, LOVETT, Loyola UniversityLaw NewSchool Orleans KAREN J. SNEDDON, Mercer University STEWART E. STERK, Yeshiva University School of Law Moderator: AMY M. HESS, University of Tennessee College of Law Moderator: BENJAMIN ORZESKE, Uniform Law Commission

THE SECURE ACT: RETIREMENT PLANNING AND MONETARY EXPECTATIONS THE ETHICAL AND PROFESSIONAL Tuesday, August OF 14, TRUST 2020 AND ESTATE OBLIGATIONS 12:30-1:30 pm ET LAWYERS IN TIMES OF WOE CHRIS HOYT, University of Missouri-Kansas City School of Law Tuesday, December 14, 2021 12:30-1:30 pmCollege ET of Law Moderator: AMY M. HESS, University of Tennessee NICKY BOOTHE, Florida A&M University PHYLLIS C. TAITE, Florida A&M University Moderator: BRADLEY MYERS, University of North Dakota

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in Probate with permission. All rights reserved. This information or any portion thereof may not be JPublished ULY/AUGUST 2020 & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced 1 copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

November/December 2021 1

CONTENTS November/December 2021 • Vol. 35 No. 6

10 22 Features 10

22

Departments

Lifesavers for Adverse Tax Reform: 6 Opportunity Zone Investing and Other Options 8

By Philip R. Hirschfeld

Asymmetrical Conservatorship Litigation

By John H. Sugiyama

34 An Introduction to Community Property Trusts

By Michael A. Sneeringer

Young Lawyers Network Uniform Laws Update

16

Keeping Current—Property

28

Keeping Current—Probate

50

Career Development and Wellness

54

Environmental Law Update

42 An Overview of the Delaware Statutory 56 Practical Pointers from Trust Practitioners

By Claire M. Love and Pranav Gangele 58 Technology—Probate 60

2021 Article Index

64

The Last Word

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

2

November/December 2021

A Publication of the Real Property, Trust and Estate Law Section | American Bar Association

EDITORIAL BOARD Editor Edward T. Brading 208 Sunset Drive, Suite 409 Johnson City, TN 37604

ABA PUBLISHING Director Donna Gollmer

Articles Editor, Real Property Brent C. Shaffer Young Conaway Stargatt & Taylor, LLP Rodney Square 1000 N. King Street Wilmington, DE 19801

Art Director Andrew O. Alcala

Articles Editor, Trust and Estate Michael A. Sneeringer Porter Wright Morris & Arthur LLP 9132 Strada Place, 3rd Floor Naples, FL 34108

ADVERTISING SALES AND MEDIA KITS Chris Martin 410.584.1905 chris.martin@mci-group.com

Senior Associate Articles Editors Thomas M. Featherston Jr. Michael J. Glazerman

Cover Getty Images

Associate Articles Editors Travis A. Beaton Kevin G. Bender Kathleen K. Law Amber K. Quintal Jennifer E. Okcular Heidi G. Robertson Aaron Schwabach Bruce A. Tannahill

Managing Editor Erin Johnson Remotigue

Manager, Production Services Marisa L’Heureux Production Coordinator Scott Lesniak

All correspondence and manuscripts should be sent to the editors of Probate & Property.

Departments Editor James C. Smith Associate Departments Editor Soo Yeon Lee Editorial Policy: Probate & Property is designed to assist lawyers practicing in the areas of real estate, wills, trusts, and estates by providing articles and editorial matter written in a readable and informative style. The articles, other editorial content, and advertisements are intended to give up-to-date, practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.

The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either the American Bar Association or the Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered the rendering of legal or ethical advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are intended for educational and informational purposes only. © 2021 American Bar Association. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Contact ABA Copyrights & Contracts, at https://www.americanbar.org/about_the_aba/reprint or via fax at (312) 988-6030, for permission. Printed in the U.S.A.

Probate & Property (ISSN: 0164-0372) is published six times a year (in January/February, March/ April, May/June, July/August, September/October, and November/December) as a service to its members by the American Bar Association Section of Real Property, Trust and Estate Law. Editorial, advertising, subscription, and circulation offices: 321 N. Clark Street, Chicago, IL 60654-7598.

The price of an annual subscription for members of the Section of Real Property, Trust and Estate Law ($20) is included in their dues and is not deductible therefrom. Any member of the ABA may become a member of the Section of Real Property, Trust and Estate Law by sending annual dues of $70 and an application addressed to the Section; ABA membership is a prerequisite to Section membership. Individuals and institutions not eligible for ABA membership may subscribe to Probate & Property for $150 per year. Single copies are $7 plus $3.95 for postage and handling.

Requests for subscriptions or back issues should be addressed to: ABA Service Center, American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598, (800) 285-2221, fax (312) 988-5528, or email orders@americanbar.org.

Periodicals rate postage paid at Chicago, Illinois, and additional mailing offices. Changes of address must reach the magazine office 10 weeks before the next issue date. POSTMASTER: Send change of address notices to Probate & Property, c/o Member Services, American Bar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60654-7598.

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

November/December 2021 3

The Editorial Board of Probate & Property magazine is interested in reviewing manuscripts in all areas of trust and estate or real property law. Probate & Property strives to present material of interest to lawyers practicing in the areas of real property, trusts, and estates.

Authors should aim to provide practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.

Manuscripts should be submitted to the appropriate articles editor: FOR REAL PROPERTY: FOR TRUST & ESTATE: Brent C. Shaffer Michael A. Sneeringer Young Conaway Stargatt & Taylor, LLP Porter Wright Morris & Arthur LLP Rodney Square, 1000 N. King Street 9132 Strada Place, 3rd Floor Wilmington, DE 19899-0391 Naples, FL 34108 bshaffer@ycst.com MSneeringer@porterwright.com On our website (www.americanbar.org/groups/real_property_trust_estate/publications/ probate-property-magazine/) click on the links under the "Probate & Property Resources" section for complete author guidelines and submission requirements.

If you have any questions, please email erin.remotigue@americanbar.org.

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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November/December 2021

WINNERS OF THE 2021 RPTE LAW STUDENT WRITING COMPETITION FIRST PLACE:

“Blood Does Not Necessarily Make a Family (or Any Fraction Thereof): Intestate Succession, Half-blood Siblings, and Assisted Reproductive Technology”

by Madison Orcutt, University of San Diego School of Law

SECOND PLACE:

“Physician-assisted Death and the Slippery Slope: Carving Out an American Ledge”

by Zachary Carstens, Pepperdine University School of Law

THIRD PLACE:

“On Estate of Elkins and a New Path to Valuation of Collectibles”

by Peter Mezey, NYU School of Law Madison Orcutt, the first-place winner, will receive $2,500 cash, a one-year free membership in the Section, and free round-trip airfare and weekend accommodations to attend the Section’s Fall Leadership Meeting, October 14-16, 2021, in St. Louis, Missouri.

She is eligible for a full-tuition scholarship to the University of Miami School of Law’s Heckerling Graduate Program in Estate Planning or the Robert Traurig-Greenberg Traurig Graduate Program in Real Property Development for the 2021–2022 or 2022– 2023 academic year. In addition, Madison’s essay will be considered for publication in a future issue of the Real Property, Trust & Estate Law Journal.

Zachary Carstens, the second-place winner, will receive $1,500 cash. Zachary’s submission will also be considered for publication in a future issue of the Real Property, Trust & Estate Law Journal.

Peter Mezey, the third-place winner, will receive $1,000 cash. Peter’s submission will also be considered for publication in a future issue of the Real Property, Trust & Estate Law Journal.

The goal of the RPTE student writing contest is to encourage and reward law student writing on the subjects of real property or trust and estate law. The essay contest is designed to attract students to these law specialties and to encourage scholarship and interest in these areas. Articles submitted for judging are encouraged to be of timely topics and not previously published.

The Section thanks Michael Ostermeyer and the 2021 selection committee: Robert Paul, Edward Brading, Amy Milligan, Birch Douglass, Amy Hess, Susan Gary, Ray Prather, and Andrea Boyack.

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

November/December 2021 5

YOUNG LAWYERS NETWORK How to Connect with Clients and Referral Sources in the New Year At the time of this writing, the delta variant of COVID-19 is in full swing, and many of our expectations about a fully reopened economy are being adjusted. In some regions of the country, in-person meetings are still occurring, but they may be discouraged by the time this issue of Probate & Property is in your hands. Whether or not the country is fully reopened, we hope you will benefit from our pointers below when it comes to making new professional connections in 2022.

1. Be friendly. People do business with those they know, like, and trust. When in doubt, smile.

Make it a genuine one. People who smile are significantly more attractive than those who do not.

A good smile sets the tone for any interaction and speaks volumes about who you are and how you think.

2. Be authentic. Being yourself helps you connect for a few important reasons. First, it puts you at ease. Second, you will be most confident when you are yourself. Third, you can easily repeat the behavior, which allows you to be consistent in all your communications with all your connections. Finally, it sets the stage for sincere conversation.

3. Stay in touch. Staying in touch For more information on the RPTE YLN, please contact: Josh Crowfoot, Chambliss, Bahner & Stophel, P.C., Liberty Tower, 605 Chestnut Street, Suite 1700, Chattanooga, TN 37450, jcrowfoot@chamblisslaw.com.

4.

5.

6.

7.

is more valuable than making an initial connection. You already have a network of people who know and like you. If you’re an attorney reading this column, you have already succeeded in life while many others have failed. No individual succeeds alone. People helped you along the way. Stay in touch, so you can be top of mind for others.

Provide value. To establish any connection with someone, value must be exchanged. One-sided connections do not last. Aim to always provide more value than you receive.

Keep your promises. Connections and clients remember the promises you make and whether you fulfilled them. Always follow through on any promise. Reliability is key. Connections that refer a new client to you want to know that you treated their referral well. How you treat their referral reflects on them. Never fail to follow through on a client referral— the referral source will inevitably find out, and it may be the last referral you get.

Project your best image. How you look (in person and online via your social media presence) can determine your ability to connect with others. Always be professional in your physical appearance and social commentary online. Do not post anything that you would not want a potential client or referral source to see.

Find common ground. The sooner you can find something in

common with your potential connection, the sooner all barriers will disappear. Find the common ground, and you will always have something to talk about with that person.

8. Take a genuine interest. Take a genuine interest in others before you expect them to take a genuine interest in you. Ask questions. Be curious. People love to talk about themselves. On average, people tend to like others who take a genuine interest in them. It is the easiest way to break the ice with someone, and you will be able to qualify them as a potential referral source or business prospect.

There’s an opportunity to learn from them, too.

9. Go slowly. The less you focus on your motive to meet a connection, the more likely it is that your connection will be successful. Seek friendship and acceptance first.

Drop whatever agenda you might have and focus on connecting, not extracting.

10. Be prepared. When you meet a connection that could be a referral source or client, do your homework ahead of time. Do not ask questions whose answers can be found online. If you are meeting a potential client, know that person’s business inside and out.

Know their customers or clients.

Know their hot buttons. Know their heartburn issues. Be able to pitch your services to meet their needs.

11. Take risks. Some attorneys tend to be very introverted; others are

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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November/December 2021

YOUNG LAWYERS NETWORK

very extroverted. Any time you attempt to make a professional connection, you are taking a risk. The connection may choose to reject your effort to connect.

As the adage goes, “no risk, no reward.” You can mitigate your fear by being prepared, having self-confidence, and projecting

your best image. But you have to take steps to connect.

12. Be positive. It seems to be endlessly repeated these days, but you must have a positive attitude when engaging people. Your attitude shapes how you communicate with others and how you are perceived by them. People like

to be around those who are positive, not negative. Attract people; do not repel them.

At the Young Lawyer’s Network, we hope that your 2022 is a prosperous one with many new professional connections. n

RPTE PUBLICATIONS

An Estate Planner’s Guide to Family Business Entities Family Limited Partnerships, Limited Liability Companies, and More Fourth Edition

Louis A. Mezzullo

2020, 271 pages, Paperback/eBook Product Code 5431120 $139.95 List Price $109.95 RPTE Members

To help guide you through the process of using family limited partnerships and limited liability companies as effective estate planning tools, Louis A. Mezzullo provides detailed analyses of complex information in a concise format. He compares the advantages, disadvantages, and restrictions of S corporations, C corporations, partnerships, LLCs, and trusts, explaining how best to reduce taxation and minimize administration expenses. Topics range from choosing and forming the right entity to transfer tax issues and drafting the operating agreement for an LLC. Sample form documents include partnership agreement for an LLC, operating agreement, deed of gift, table of IRC and treasury regulations, and more.

All RPTE publications can be purchased on the ABA Web Store, ShopABA.org, or by calling the Service Center, 800-285-2221.

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

November/December 2021 7

UNIFORM LAWS U P D AT E News from the ULC 2021 Annual Meeting The Uniform Law Commission (ULC) held its 130th Annual Meeting in Madison, Wisconsin, in July. Seven new uniform acts were approved, and four other draft acts were read and critiqued.

The ULC also announced new projects: four drafting committees and two study committees. This issue of Uniform Laws Update will summarize the acts and projects involving real property, trust, and estate law. For a complete report from the 2021 annual meeting, visit the “News” page at www.uniformlaws.org.

Uniform Community Property Disposition at Death Act (UCPDDA).

Community property acquired by a married couple retains its character as community property even when the couple relocates to reside in a noncommunity property state. This result creates potential distribution problems at the death of the first spouse and also creates potential estate planning opportunities. A probate court or trustee in a non-community property state may not recognize the character of community property in a decedent’s estate, which could lead to a misallocation of the decedent’s property or disputes between a surviving spouse and the decedent’s other heirs. This act is an update of a 1971 act, adopted by many jurisdictions, which applies only to probate proceedings. The UCPDDA also addresses non-probate transfers of community property and provides clear default rules to ensure the proper disposition of community property from any estate, in any jurisdiction. It is Uniform Laws Update Editor: Benjamin Orzeske, Chief Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602.

Uniform Laws Update provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.

recommended for adoption by all non– community property states.

Uniform Cohabitants’ Economic Remedies Act (UCERA). The rate of nonmarital cohabitation within the United States is increasing rapidly. Today, states have no consistent approach for addressing whether and how cohabitants can enforce contract and equitable claims against each other when the relationship ends. The UCERA provides clear guidance for courts adjudicating these claims but does not create any new legal status for cohabitants. In most instances, the act defers to other state laws governing contracts and claims between individuals. The UCERA enables cohabitants to exercise the same rights as noncohabiting citizens to contract and to maintain breach-of-contract and equitable claims based on “contributions to the relationship.” Those contributions can include domestic services like cooking, cleaning, performing household maintenance, and caring for the other cohabitant or the cohabitant’s child or relative but do not include sexual relations. The UCERA will help ensure more consistent treatment of cohabitants’ claims in state courts without

subjecting claimants to any additional hurdles that would not be imposed on litigants who live apart.

Amendments to the Uniform Common Interest Ownership Act (UCIOA).

The UCIOA is a comprehensive statute governing three forms of common ownership of real estate: condominiums, homeowners associations, and cooperatives. This set of amendments addresses recent legal developments concerning, among other issues, retained rights by a developer, mandatory versus default rules, limited common elements, and termination of common interest communities.

Another new act does not directly involve the law of property but has broad implications for legal practitioners, among others. The Uniform Personal Data Protection Act (UPDPA) is a comprehensive privacy law, similar in scope to the laws adopted in the European Union and a few US states but with an innovative new standard for protecting personal data. Privacy issues are controversial because the stakes are high for both consumers and businesses. The UPDPA recognizes that the collection and use of personal data are important features of our modern economy and outlines compatible, incompatible, and prohibited data practices based on a consumer’s expectations. The act provides a reasonable level of consumer protection without incurring the compliance and regulatory costs associated with the first-generation statutes governing personal data.

A new drafting committee on Mortgage Modifications will draft a uniform or model act to standardize state laws concerning whether modifying the

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

8

November/December 2021

UNIFORM LAWS U P D AT E

terms of a mortgage requires recording an instrument to document changes to the previously recorded mortgage. The act also will clarify when a modified mortgage retains its priority over subsequent creditors to secure repayment of the debt.

A drafting committee on Restrictive Covenants in Deeds will draft a new uniform law governing the removal of discriminatory restrictive covenants from recorded property records. Many older deeds contain restrictions based on race or religion. Though discriminatory restrictions are unenforceable, some property owners want the offensive provisions expunged entirely.

States have begun to accommodate those requests but without a consistent process. The American Land Title Association proposed this project to draft a uniform state law providing a standard process for the removal of discriminatory restrictions without affecting the integrity of a property’s chain of title.

Another new drafting committee will revise the Uniform Determination of Death Act. This widely adopted act, originally approved in 1980, provides a simple two-prong test to determine when an individual is legally dead. A physician must verify that an individual

has sustained either (1) irreversible cessation of circulatory and respiratory functions or (2) irreversible cessation of all functions of the entire brain, including the brain stem. The second prong that defines brain death needs updating to ensure conformity with recent advances in medical science and evolving standards of practice.

Last year, a New Jersey federal judge’s husband and son were shot at their front door by a disgruntled former litigant who targeted the judge’s family by getting her home address from public records. In the wake of this horrific act of violence, states are beginning to pass legislation allowing the redaction of personal information of judges and other public officials from public records. There is no consistent approach, however. A new study committee on Redaction of Personal Information from Public Records will determine whether a uniform or model act on the subject is feasible and the scope of any potential drafting project.

All ULC drafting committees are open for participation by any interested party. More information about these and other uniform acts and drafting projects is available at www. uniformlaws.org. n

Don’t let the RPTE Publications get away from you.

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STATEMENT OF OWNERSHIP, MANAGEMENT AND CIRCULATION (PS Form 3526, July 2014)

(Act of August 12, 1970: Section 3685, Title 39, United States Code) 1. Title of publication: Probate & Property (ISSN: 01640372). 2. P.N. 010-781. 3. Date of filing: 10/1/2021. 4. Issue Frequency: Bi-Monthly. 5. No. of issues published annually: Six. 6. Annual subscription price: $20. 7. Complete mailing address of known office of publication: 321 N. Clark Street, Chicago, IL 60654-7598. 8. Complete mailing address of the headquarters or general business offices of the publisher: American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598. 9. Full names and complete mailing address of publisher, editor, and managing editor: Publisher: American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598; Editor: Edward T. Brading, Attorney at Law, 208 Sunset Drive, Suite 409, Johnson City, TN 37604; Managing Editor: Erin Remotigue, American Bar Association; 321 N. Clark Street; Chicago, IL 60654-7598. 10. Owner (if owned by a corporation, its name and address must be stated and also immediately thereunder the names and addresses of stockholders owning or holding 1% or more of total amount of stock. If not owned by a corporation, the names and addresses of the individual owners must be given. If owned by a partnership or other unincorporated firm, its name and address must be stated): American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598. 11. Known bondholders, mortgagees, and other security holders owning or holding 1% or more of the total amount of bonds, mortgages or other securities (if there are none, so state): None. 12. Tax Status: Has not changed in preceding 12 months. 13. Publication title: Probate & Property. 14. Issue date for circulation data below: July 1, 2021 (35:4). 15. Extent and nature of circulation. a. Total no. copies printed (net press run). Average no. copies each issue during preceding 12 months: 17,193. Actual number of copies of single issue published nearest to filing date: 17,350. b. Paid and/or requested circulation: (1) Paid requested outside-county mail subscriptions. Average no. copies each issue during preceding 12 months: 0 . Actual number of copies of single issue published nearest to filing date: 0.

(2) Paid in-county subscriptions. Average no. copies each issue during preceding 12 months: 0. Actual number of copies of single issue published nearest to filing date: 0. (3) Sales through dealers and carriers, street vendors, and counter sales. Average no. of copies each issue during preceding 12 months: 0. Actual number of copies of single issue published nearest to filing date: 0. (4) Paid Distribution by Other Classes of Mail Through the USPS. Average no. of copies each issue during preceding 12 months: 0. Actual number of copies of single issue published nearest to filing date: 0. c. Total paid circulation. Average no. of copies each issue during preceding 12 months: 11,315. Actual number of copies of single issue published nearest to filing date: 11,257. d. Free or Nominal Rate Distribution (by mail and outside the mail):(1) Free or nominal rate outside-county copies. Average no. copies each issue during preceding 12 months: 4,686. Actual number of copies of single issue published nearest to filing date: 4,945.

(2) Free or nominal in-county copies. Average no. copies each issue during preceding 12 months: 0. Actual number of copies of single issue published nearest to filing date: 0. (3) Free or nominal rate copies mailed at other classes. Average no. copies each issue during preceding 12 months: 0. Actual number of copies of single issue published nearest to filing date: 0. (4) Free or nominal rate distribution outside the mail. Average no. copies each issue during preceding 12 months: 0. Actual number of copies of single issue published nearest to filing date: 0. e. Total free distribution (sum of 15d(1), (2), (3), (4)). Average no. copies of each issue during preceding 12 months: 4,686. Actual no. of copies of single issue published nearest to filing date: 4,945. f. Total distribution (sum of 15c and 15e). Average no. of copies of each issue during preceding 12 months: 16,001. Actual no. of copies of single issue published nearest to filing date: 16,202. g. Copies not distributed: Average no. of copies each issue during preceding 12 months: 1,192. Actual number of copies of single issue published nearest to filing date: 1,148. h. Total (sum of 15f and g). Average no. copies each issue during preceding 12 months: 17,193. Actual number of copies of single issue published nearest to filing date: 17,350. i. Percent paid. Average no. of copies each issue during preceding 12 months: 70.7%. Actual number of copies of single issue published nearest to filing date: 69.5%.

16. There are no electronic copies of this publication. I certify that 70% of all distributed copies (electronic and print) are paid above a nominal price.

I certify that the statement made by me above is correct and complete. (signed) Bryan Kay, Director, ABA Editorial and Licensing

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

November/December 2021 9

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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November/December 2021

LIFESAVERS FOR ADVERSE TAX REFORM Opportunity Zone Investing and Other Options

By Philip R. Hirschfeld

P

Getty Images

istockphoto

resident Biden’s tax reform proposals target many tax benefits associated with real estate investing. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (May 28, 2021) [hereinafter Green Book]. If adopted, the ability to effectuate tax-free like-kind exchanges may be significantly reduced, and the maximum long-term capital gains rates on sales may rise from 20 percent to the regular tax rate, although the Ways and Means Committee recently proposed an increase to only 25 percent. Id. at Philip R. Hirschfeld is an associate at Cole Schotz P.C. in New York, New York, and is the chair of the Section’s Taxation of Real Estate Committee.

84, 61. If all or part of these proposals are adopted, planning options such as investing in qualified opportunity zone funds (QOFs), refinancing existing real estate, or entering into partnership mixing-bowl transactions may become more valuable and should be explored by real estate investors seeking to cash out of their investments.

Tax Reform Proposals Affecting Real Estate Like-kind exchanges (LKEs) have been part of the Internal Revenue Code since 1921. I.R.C. § 1031. Their usage became limited by the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act), which restricted LKEs to sales of business or investment real estate. I.R.C. § 1031(a)(1). As a result, the ability to effectuate LKEs for tangible personal property (such as

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

November/December 2021 11

The gain that formerly escaped taxation under the LKE rules may become subject to tax at a 39.6 percent rate and also be subject to the 3.8 percent net investment income tax.

a company jet or business machinery) was eliminated.

To fund his proposed American Families Plan, which will provide for child-care credits, family plan leave, and education benefits, President Biden has proposed limiting the exclusion from tax for LKEs to $500,000 per year for any taxpayer or $1 million for married couples filing joint returns. The proposal would be effective for exchanges completed after December 31, 2021.

Green Book, supra, at 84.

The LKE proposal’s effective date presents a concern for like-kind exchanges commenced during the last half of 2021. Most LKEs are completed on a deferred basis—in which the relinquished property is sold and the replacement property is acquired at a later date, which is the earlier of 180 days after the sale of the relinquished property or the filing date for the tax return for the year including that sale date. I.R.C. § 1031(a)(3). If the legislation is adopted with the proposed effective date, then taxpayers commencing an LKE in 2021 will need to complete it by December 31, 2021 in order to avoid being subjected to this limitation.

The LKE proposal allows for gain exclusion of up to $500,000 for each taxpayer. Because a partnership that owns real estate is not a taxpayer, this limitation should, if adopted, be applied at the partner level rather than at the partnership level, assuming the LKE is not further modified. An

S corporation is usually not a taxpayer except in unusual cases; for example, tax may be owed by an S corporation that was previously a C corporation and then sells, within five years, property owned on the date of conversion. I.R.C. § 1374. If LKE legislation becomes law, clarification should be made that any limitation will be applied at the S corporation shareholder level, and similar treatment should also be afforded other pass-through entities (such as REITs) so that the $1 million/$500,000 allowable exclusion is applied to each owner rather than the entity itself.

In any LKE, gain may be recognized if the exchange cannot find replacement property within 180 days or upon the receipt of cash, which is referred to as taxable boot, along with eligible replacement property. If the LKE spans two years and all applicable LKE safe harbor regulations are complied with (e.g., by use of a qualified intermediary to hold the cash), any gain would be recognized under the installment method, which results in gain recognition in the second year. Temp. Reg. § 15A.453-1(b) (3)(i); Reg. § 1.1031(k)-1(g)(3), (4).

The LKE proposal states that gain in excess of the maximum $1 million/$500,000 gain exclusion amount would be recognized by the taxpayer in the taxable year in which “the taxpayer transfers the real property subject to the exchange.” Green Book, supra, at 84. If a taxpayer enters into a deferred exchange that straddles two taxable years, the gain would be triggered in the

first taxable year when the relinquished property is transferred, rather than the second year when the exchange is completed. Unless this result is changed in any legislation, taxpayers doing LKEs with gain in excess of the maximum $1 million/$500,000 exclusion amount will need to pay the tax in the year of sale even though they do not receive the replacement property until the second year.

Apart from changes to LKEs, the Green Book proposes to increase the long-term capital gains rate from 20 percent to the maximum ordinary income tax rate (proposed to be 39.6 percent) for taxpayers having more than $1 million of adjusted gross income per year. Id. at 61. On September 15, 2021, the Ways and Means Committee changed that to increase the long-term capital gains rate to only 25 percent. As a result, the gain that formerly escaped taxation under the LKE rules may become subject to tax at a 25 percent rate, or some other increased rate, and also be subject to the 3.8 percent net investment income tax.

The Green Book proposes to tax unrealized appreciation in real estate or other assets owned at death. Certain exclusions would be added—for example, transfers between spouses would be excluded and a $1 million per person limitation from taxation of resulting gains would be added. Transfers to spouses that are not subject to tax will cause the surviving spouse to get a carryover basis rather than a step-up in tax basis as exists under current law. Id. at 62–64.

These proposals have made investors jittery about the future treatment of gain on sale of real estate. As a result, taxpayers may be searching for possible avenues for relief if their fears about tax reform become a reality and all or some of these proposals are adopted.

QOFs as an Investment Option Taxpayers that may be subject to higher taxes on capital gains can defer taxation of those gains until 2026 if they timely invest those gains into a QOF. I.R.C. § 1400Z-2(a)(1). If that investment is made before the end of 2021,

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10 percent of that gain would be forgiven. Id. § 1400Z-2(b)(2)(B)(iii). While that still leaves 90 percent of the gain to be taxed in 2026, the QOF offers the ability to avoid paying any tax on a sale of the real estate owned by the fund or the interest in the QOF if it is sold 10 years or more after the gains are first invested in the QOF. Id. § 1400Z-2(c).

Unlike LKEs, elimination of gain does not require finding a suitable replacement property and the need to invest all the sales proceeds to acquire that property. The cash from the sale can be used for any purpose.

Use of leverage by a QOF substantially magnifies the tax savings on a later sale. If investors contribute $2 million to a QOF that incurs $8 million of debt to buy and improve the real estate, and that $10 million investment grows in value by only six percent per year, then after 10 years, the real estate will be worth more than $17.9 million.

On a sale after 10 years, the $7.9 million economic gain will not be taxed.

In addition, the taxable gain on sale is greater than $7.9 million because each year, depreciation deductions taken with respect to the property reduce the basis of the property. Those depreciation deductions gave a current benefit to the QOF investors, which is not then recaptured on a sale after 10 years. If a taxpayer passes away before 10 years, her heirs can step into her shoes and eliminate tax on a sale 10 years or more after the original capital gain was invested in the fund.

Some investors may believe that a QOF must be structured as a traditional investment vehicle created by an investment manager and others who may charge fees that can reduce their economic yield. A QOF includes, however, any partnership formed between two or more investors to invest in an opportunity zone. Two investors or a family group can pool their resources to invest in an opportunity zone as long as they have competent advisers who can ensure they comply with the technical qualification requirements that apply throughout the life of the fund.

Some investors may believe that investments can be made only in

economically blighted areas where the chance for economic reward from operations and sale may be remote. There are more than 5,700 opportunity zones around the nation, however, and many have already started the transition to highly promising and profitable sites.

Some investors may think the technical requirements for operating a QOF can become overwhelming. In principle, however, a fund that buys existing real estate must improve it by investing cash greater than the purchase price of the building over a 30-month period, which gives it time to complete its project. The QOF will usually form a subsidiary partnership to acquire the real estate and construct the improvements to allow it to retain cash for working capital, but the added burden of having a second partnership and an added tax filing is usually manageable with the right set of tax accountants.

Some investors may fear that Congress may also scrap opportunity zone benefits. However, no proposal has yet been made to eliminate them. Although some criticism has been leveled as to whether the QOF program is producing as many new jobs as expected, the program’s focus on aiding communities in need makes the chance of elimination seem small, especially compared to other more visible targets such as LKEs and capital gain preferential taxation.

The only caveat is for an investor who has a capital gain subject to tax under existing law that is invested in a QOF, and then the capital gains tax rate increases. Taxation of the capital gain is deferred until 2026, at which time it may then be taxed at higher rates.

Although a hypothetical higher tax rate could undercut the benefit of tax deferral, the tax exclusion on the sale of an interest in a QOF or the sale by a QOF of zone property after 10 years becomes even more valuable because it eliminates taxation at higher rates.

An investor should balance these considerations to determine what his best option is.

The bottom line is that the closer we get to tax reform becoming a reality, the more prices may climb in opportunity zones. As a result, now may be the time

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The step transaction doctrine is a subjective test, which can be difficult to prove and especially time-consuming.

to consider investing in a QOF, whether formed by an investment manager or by a small group of investors.

Refinancing as an Alternative to a Taxable Sale Another way to alleviate the pressure of tax reform on a sale is to consider ways to try to cash out while not recognizing capital gain. When real estate values climb, refinancing existing debt and obtaining added cash is not a taxable event to the owner because the taxpayer still owns the property, and the expectation is the debt will become due and payable at some future date.

If a partnership owns the property, incurs debt, and then distributes borrowed funds to the partners, the partners are taxable on that distribution only if the distribution exceeds their outside basis for their partnership interest. Id. § 731(a)(1). When the property is held by a partnership, added partnership debt allows the partners to increase their basis for their partnership interests. Id. § 752(a). That increase in tax basis can offset the reduction in tax basis resulting from a cash distribution, so the partners’ basis remains unchanged, and the cash distribution is tax-free. Ultimately, when the debt is paid down, the partners may be subject to taxation. The step-up in basis at death is a way to eliminate the prospect of paying tax when the debt is paid

off, but that tax planning option is also under siege.

Partnership Mixing Bowl Transactions Another way to try to eliminate tax is to consider doing a partnership “mixing bowl transaction.” One example of a mixing bowl transaction involves two parties who have property they would like to exchange, when the exchange would be taxable because LKE treatment may not be available.

Instead of doing a taxable exchange, each party becomes a partner of a new partnership, and each party contributes his property to the partnership.

The two-person partnership then serves as the mixing bowl that now owns and operates both properties. After a set time, the partnership may dissolve and distribute the property contributed by each partner to the other partner.

A mixing bowl transaction is built upon the fundamental tax principles that contributions of property by partners to partnerships and distributions of property by partnerships to partners are generally tax-free events. Id. §§ 721, 731. Based on these principles, the mixing bowl transaction potentially allows for tax-free treatment on formation of the mixing bowl and tax-free treatment on later distributions of property when the mixing bowl is broken up and the partnership dissolved. As a result,

there is the potential for exchanging one property for another property in a tax-free manner if done through a partnership mixing bowl.

The step transaction doctrine afforded the IRS a basis to challenge each mixing bowl transaction by asserting that the overall transaction should be recast as a deemed taxable exchange.

See, e.g., Smith, 78 T.C. 350 (1982). The step transaction doctrine is a subjective test, which can be difficult to prove and especially time-consuming. Rather than litigating every case based on step transaction principles, the IRS needed objective criteria to battle these mixing bowl transactions, which came in a series of amendments to the Internal Revenue Code.

Congress first adopted a disguised sale of property rule, which gave the IRS regulatory authority to write regulations recharacterizing a contribution of property to a partnership and a later distribution of other property to the contributing partner as a deemed taxable sale of the property. I.R.C. § 707(a) (2). The resulting regulations created a rebuttable presumption that a distribution made within two years of the contribution would be a taxable sale.

Reg. § 1.707-3. Despite these changes, many taxpayers decided to stay together for more than two years before they took action to break up their mixing bowl, which left the IRS back to relying on difficult-to-prove subjective assertions to combat these patient taxpayers.

Congress then followed up by adding two new statutory provisions. These rules required the partners to stay together in their mixing bowl partnership for more than seven years in order to get tax-free treatment on contributions and distributions of property that are part of their mixing bowl transaction. If the contributed property is distributed to another partner within seven years of the date of contribution, then the contributing partner may recognize gain relating to the contributed property. I.R.C. § 704(c)(1)(B). Alternatively, the contributing partner may recognize gain when the originally contributed property is retained by the

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partnership, but other property is distributed to the contributing partner within seven years of the initial contribution. Id. § 737.

These added rules put a damper on mixing bowl transactions but did not eliminate them. Although the parties need to stay partners for at least seven years before seeking to dissolve their arrangement to escape taxation on an otherwise taxable property transaction, that patience may be rewarded if LKEs and capital gains benefits are eliminated. Furthermore, in the interim, the parties could choose to allocate disproportionately distributions and related taxable income or loss from the properties to reflect better their ultimate business goal.

For example, if A owns Building X and B owns Building Y and both buildings have equal value, the mixing bowl partnership resulting from a

contribution of Building X and Building Y will make A and B equal partners.

A and B must wait seven years before A can get Building Y and B can get Building X. In the interim, 50 percent of all cash flow and taxable income and loss from both properties may be allocated to A and 50 percent to B. However, to better reflect the business goal of A getting Property Y and B getting Property X, the parties can provide that 80 percent of all cash flow and taxable income or loss from Building Y is allocated to A and 20 percent to B and 80 percent of all cash flow and taxable income or loss from Building X is allocated to B and 20 percent to A. The goal is to move closer to the business deal of A getting Property Y and B getting Property X, but to not move too close, to avoid allowing the IRS to collapse the overall deal and assert that a deemed taxable sale of the properties occurred. For example,

allocating 99 percent of cash flow and taxable income or loss from one property to A and 1 percent to B is very aggressive and may cross the line by causing a deemed taxable exchange to be made upon formation of the mixing bowl.

Conclusion The Green Book proposals have been met with opposition from various groups that cross over political party lines. As a result, it is far from certain how and when any legislation may shape up and whether it may pass both houses of Congress. Nonetheless, the possible planning options discussed above such as investing in QOFs, refinancing, or entering into mixing bowl transactions add to the options currently available for taxpayers wishing to cash out of their real estate investments in a more tax-efficient manner. n

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November/December 2021 15

KEEPING CURRENT PROPERTY CASES BONA FIDE PURCHASE: Foreclosure buyer paying low price is not bona fide purchaser when owner lacks notice of sale. After the Georges failed to pay $205 in assessments on their North Carolina home, the homeowners’ association filed a claim of lien and initiated foreclosure proceedings. The homeowners’ association did not serve the Georges personally or by mail at their official residence in the Virgin Islands but personally served a person at the home who represented herself to be Mrs. George but turned out to be the Georges’ daughter. The foreclosure buyer purchased the property for $2,650 and soon resold it to a company that planned to spend $50,000 in renovations and market the property for $240,000. The Georges successfully moved to set aside all proceedings due to a lack of notice of the unpaid fees or foreclosure proceedings. The trial court declared all deeds and transactions null and void. The buyers appealed, claiming they were good faith purchasers for value. The intermediate appellate court held that the trustee failed properly to serve the Georges because the home in question was not their usual place of abode but found the buyers were good faith purchasers for value based on “constitutionally sufficient notice,” given the multiple attempts to notify the Georges of the pendency of foreclosure proceedings. The supreme court reversed. A good faith purchaser for value must purchase “without notice, actual or constructive, of any infirmity” and pay “valuable consideration.”

N.C. Gen. Stat. § 1-108. Although mere Keeping Current—Property Editor: Prof.

Shelby D. Green, Elisabeth Haub School of Law at Pace University, White Plains, NY 10603, sgreen@law.pace.edu. Contributor: Prof. Darryl C. Wilson.

Keeping Current—Property offers a look at selected recent cases, literature, and legislation.

The editors of Probate & Property welcome suggestions and contributions from readers.

inadequacy of purchase price alone is not sufficient to upset a sale, there was more here that should have prompted the buyers to question the sale—the deed under which the Georges took title showed they resided in the Virgin Islands, the affidavit of service revealed several unsuccessful attempts at service in the Virgin Islands, the only service was at the property, and the Georges paid over $100,000 for the property, which was free and clear of all liens other than the $205, making it unreasonable to assume that the Georges would knowingly allow the foreclosure to proceed without objection. The court set aside the transfers but remanded for a determination whether restitution was in order. In re George, 856 S.E.2d 483 (N.C. 2021).

DEEDS: Unrecorded plat referred to in recorded deed creates easement appurtenant. RLC contracted to buy a one-acre parcel, Lot C, from 4N. The town approved and recorded a minor subdivision plan dated January 20, 2016, which included a metes and bounds description of the lot and showed access by a 40-foot-wide right of way named Nunes Lane. A second minor subdivision plan, dated January 5, 2016, was also prepared, and it contained the same metes and bounds description for lot C, but it was never approved by the town. The warranty deed from 4N to RLC incorporated by reference the January 5 plan, but not

the January 20 plan. After closing, RLC discovered it lacked access to the lot on account of a row of boulders placed at the entrance of the lane. RLC sued, seeking a declaration of a right of way and injunctive relief for the removal of the boulders. The trial court granted summary judgment to RLC, finding the warranty deed clearly and unambiguously granted an easement over Nunes Lane. The court declined to examine extrinsic evidence, including affidavits asserting that 4N told RLC that an easement over Nunes Lane would not be included in the sale and refused to consider the fact of the boulders in place as bearing on intent. The supreme court affirmed. Under well-established principles, when a property owner subdivides land and sells with reference to a subdivision plan, the purchaser of the lot is granted an easement in the roadways shown on the plan. The easement is appurtenant to the property and passes with the conveyance of the property unless specifically excluded, even though not mentioned in the deed. Here, the record reflects that Nunes Lane was platted in town plans since at least 2007 and the conveyance of Lot C was made with reference to the unrecorded January 5 plan. It was not relevant that the town failed to approve or record the January 5 plan. All that mattered was that in the plan, Nunes Lane was depicted as a lane that abutted Lot C. The plan confirmed a lane, not a wall of boulders. Read’s Landscape Constr., Inc. v. Town of West Warwick, 252 A.3d 713 (R.I. 2021).

FORECLOSURE: Filing fee assessed against residential foreclosure plaintiffs violates free access clause of state constitution. An Illinois statute created state programs to provide nonlegal housing counseling for citizens and to maintain abandoned residences, funded by a $50 filing fee for all

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residential mortgage foreclosure cases.

735 Ill. Comp. Stat. 5/15-1504.1. Plaintiffs who had filed foreclosure cases sought injunctive relief, claiming the fee violated the “free access” clause of the state constitution. Ill. Const. 1970, art. I, § 12. The government argued that the voluntary payment doctrine precluded the plaintiffs’ claims because they did not pay the filing fee “under protest.” The trial court ruled for the plaintiffs, finding the duress exception applied, and went on to declare the statutes facially unconstitutional. The supreme court affirmed, agreeing that the voluntary payment doctrine did not bar the plaintiffs’ claims. When a mandatory filing fee is required for access to judicial process, duress is implied.

The court also affirmed the holding of unconstitutionality, applying a rational-basis analysis for free-access claims involving filing fees. To be constitutional, the purpose of the fee must relate to the operation and maintenance of the courts. The relationship cannot be attenuated; it must be direct, clear, and ascertainable. The ends asserted by the government—serving to prevent foreclosures, thereby reducing their numbers and facilitating the functioning of the courts—were too remote.

Instead, the court saw the additional fee as a “litigation tax,” a revenue-raising measure to fund statewide social programs, which required foreclosure litigants to bear an unfair share of that burden. Walker v. Chasteen, 2021 Ill. LEXIS 612 (Ill. June 17, 2021).

FORECLOSURE: Sale of condominium unit by homeowners association in violation of bankruptcy automatic stay is void. After Hill fell behind in his condominium assessments, the homeowners association (HOA) recorded a notice of delinquent assessment lien.

The next month, the HOA recorded a notice of default and notified Hill that he must pay $3,120 or his home would be sold. Shortly thereafter, Hill filed a chapter 13 bankruptcy petition and stated in his plan that he was surrendering the property to the HOA and the bank, which held a deed of trust senior to the assessment lien. An automatic

stay under the Bankruptcy Code went into effect. 11 U.S.C. § 362(a). While the bankruptcy petition was still pending, the HOA recorded a notice of foreclosure sale and, several weeks later, sold the property to a trust for $6,072. The bank sued to quiet title, for declaratory relief that the sale was void and did not extinguish its first lien, for a preliminary injunction to prevent the trust from selling or transferring the property, and for an order declaring the bank could foreclose on its deed of trust. The bank also sued the HOA for violation of Nev. Rev. Stat. § 116.1113 (requiring good faith in the performance of a contract) and for wrongful foreclosure.

The trial court granted summary judgment to the trust, simply ruling that the foreclosure sale extinguished the bank’s deed of trust, and the trust purchased the property free and clear of the bank’s claim. The Ninth Circuit Court of Appeals reversed. First, it determined that the bank had standing to challenge a violation of the automatic stay—the extinguishment of the deed of trust could be fairly traced to the HOA’s violation of the stay. Second, the court held that the bank’s grievance fell within the zone of interests protected by the statute under which the bank brought its claim, which allows suit “by any person against another who claims an estate or interest in real property, adverse to the person bringing the action, for the purpose of determining such adverse claim.” Nev. Rev. Stat. § 40.010. Third, under Nevada law, HOA foreclosure sales in violation of a bankruptcy automatic stay are not merely voidable but void. Bank of New York Mellon v.

Enchantment at Sunset Bay Condo. Ass’n, 2 F.4th 1229 (9th Cir. 2021).

MECHANICS LIEN: Failure to file affidavit of service makes lien unperfected and invalid. Homeowners hired Terra Firma to do construction work but dismissed the company after a dispute about the work it had performed. Terra Firma sued for damages for breach of contract and unjust enrichment and filed a mechanics’ lien for unpaid labor and materials in the amount of $131,123, under Mechanics’ Lien Law

of 1963, 49 Pa. Cons. Stat. §§ 11011902. As required by section 502 of the statute, Terra Firma effectuated service of the mechanics’ lien on the homeowners by the sheriff. 49 Pa. Cons.

Stat. § 1502. Later Terra Firma voluntarily discontinued its mechanics’ lien claim and filed another claim for the same dollar amount as the discontinued lien. The new claim was assigned a new docket number, but Terra Firma failed to file the required affidavit showing service on the homeowners.

The homeowners answered the lien claim with a counterclaim for breach of contract. In none of the ensuing enforcement actions over the next five years did they challenge the lien based on the failure to file an affidavit of service. Only after the trial court found Terra Firma had breached the contract did the homeowners file a petition to strike the mechanics’ lien, to which Terra Firma responded that they had waived the objection. The trial court ruled that the failure to file the affidavit of service made the lien unperfected and on that basis granted the petition to strike. A divided appellate court reversed, holding that the homeowners were obligated to file preliminary objections to the mechanics’ lien in the enforcement action. The supreme court, in turn, reversed. Section 502 states that to perfect a mechanics’ lien, an affidavit “shall be filed” and the failure to file the affidavit “shall be sufficient ground for striking off the claim.”

Id. Because mechanics’ liens are statutory rights, a party seeking protection “must comply strictly with the provisions of the statute conferring the right.

Terra Firma never filed the affidavit of service, leaving its lien unperfected and invalid. This defect was not curable.

The court chided the appellate court on the waiver issue because nothing in the statute imposes a time limit on filing an objection to a lien. Indeed, to the contrary, section 505 provides that the failure to file an objection preliminarily “shall not constitute a waiver of the right to raise the same as a defense in subsequent proceedings.” 49 Pa. Cons.

Stat. § 1505. The court saw the waiver claim as an attempt to give legal force to

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November/December 2021 17

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an invalid judgment. Terra Firma Builders, LLC v. King, 249 A.3d 976 (Pa. 2021).

MORTGAGE: Lender may foreclose reverse mortgage when deceased husband is sole borrower and surviving wife signs mortgage but not promissory note. The Palmeros sought a reverse mortgage for their primary residence and homestead, ultimately having Mr. Palmero apply solely so that they could borrow a higher sum. Mr. Palmero signed the necessary documents individually as the borrower, including a reverse mortgage instrument and an adjustable-rate note. Mrs. Palmero also signed the mortgage as was required for marital homestead property. Both spouses signed a nonborrower spouse ownership interest certification. Mr. Palmero died, and his estate did not repay the loan, triggering a foreclosure action which Mrs. Palmero defended by arguing she was a co-borrower. The note and mortgage allowed foreclosure only if a borrower died and the property was not the principal residence of a surviving borrower. The trial court ruled she was not a co-borrower but denied foreclosure based on a federal law that insures reverse mortgages.

The appellate court reversed, finding Mrs. Palmero was a co-borrower and that the lower court applied the federal statute in error. The supreme court reversed, holding that Mrs. Palmero was not a co-borrower. The court cited its long line of precedents establishing that a mortgage is construed together with the promissory note it secures, with deference given to the note if a conflict arises. This means that the rights and obligations of the parties are determined by reference to the note. The note represents a promise to pay, and the mortgage merely secures that promise in case of default. Because Mrs. Palermo did not sign the note, she was not a co-borrower. There was no need to look at any additional documents or employ the doctrine of adverse construction in construing the documents against the drafter. Having resolved the issue based on the documents, it was unnecessary to address the federal law issues. A thoughtful dissent made the

argument for a different rule, given that in the context of reverse mortgages, the mortgage is the primary instrument because the borrower has no personal liability under the note; the lender is limited to foreclosure in certain events.

WVMF Funding v. Palmero, 320 So. 3d 689 (Fla. 2021).

PREMISES LIABILITY: Commercial landowner is not liable to pedestrian for failure to remove snow and ice from abutting sidewalk before storm has ended. Pareja slipped and fell on ice on a driveway apron during a wintry mix of light rain, freezing rain, and sleet. He sued the landowner and the snow removal company hired by the landowner to clear the sidewalk. The trial court granted summary judgment to the landowner, but the appellate court reversed, declining to apply the “ongoing storm rule” under which a landowner has no duty to clear a sidewalk until a reasonable time after the storm concludes. The supreme court reversed, reaffirming the “ongoing storm rule,” at the same time recognizing some limiting principles. The court agreed with the landowner and amici that requiring the clearing of snow and ice during a storm would be both futile and dangerous. The court also believed that imposing such a duty on all commercial landowners swept too broadly, as it failed to take into account differences in abilities depending on the size and means of the owners. Nonetheless, if it is shown that the actions of the landowner increased the risk of injury to pedestrians or that the injuries resulted from a pre-existing risk, such as not clearing snow and ice from an earlier storm, then there might be a basis for liability. Here, none of these circumstances existed. Pareja v. Princeton Int’l Properties, 252 A.3d 184 (N.J. 2021).

beach and the access road, is restricted to unit owners and their tenants, guests, invitees, and licensees. Two posts connected by a chain were installed on the beach access road to keep the general public from accessing the lake. One day, the plaintiff rode his motorbike on the road and did not see the chain strung across the road until the last movement, at which point he tried to brake but slid along the ground before striking the chain across his throat, which caused serious injury. The plaintiff ’s mother filed a negligence action against the homeowners association and certain individuals. The trial court granted the defendants’ motions for summary judgment primarily on the ground that the state’s recreational use statute protected them from liability. Vt. Stat. tit. 12 §§ 5791-5795. The supreme court reversed, concluding that the recreational use statute does not apply because the land where the plaintiff was injured was not open to the general public, as required to trigger the statute’s grant of limited liability to landowners. The purpose of the statute is to encourage landowners to make their property “available to the public” for recreational use without consideration, id. § 5791, but here the owners expressly aimed to exclude the general public. The chain was erected specifically to deter members of the public from using the beach. The exclusive use of the beach access road by the development’s residents and their guests cannot be considered use by the public under any reasonable interpretation of the statute. In short, the court concluded, defendants did not satisfy their end of the “inherent bargain” reflected by the statute (public access in exchange for limited liability for injuries). Crogan v. Pine Bluff Estates, 257 A.3d 247 (Vt. 2021).

RECREATIONAL USE STATUTE: Statute does not confer immunity on owners of property not open to the public. The common areas of Pine Bluff Estates include a beach on the shore of Lake Memphremagog and a one-lane, unpaved road providing beach access.

Use of the common areas, including the

TAKINGS: Regulation giving union organizers access to farm is per se physical taking. A state regulation granted labor organizations a right to access agricultural property to solicit support for unionization. On notice to the employer, the organizers could enter the employer’s property for up to

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one hour before work, one hour durbrought suit, alleging the access regulaing the lunch break, and one hour after tion effected an unconstitutional, per se Google Earth https://earth.google.com/web/search/cherry+land,+newport++vermont/... work. Cal. Code Regs., tit. 8, § 20900(e) taking under the Fifth and Fourteenth Amendments of the Constitution, Cherry Ln by appropriating Newport, VT 05855 44.96°N, 72.20°W without compensation an easement for union organizers to enter their property. They sought declaratory and injunctive relief, prohibiting enforcement of the regulation.

The district court denied the motion because the regulation did not allow Imagery date: 6/2…

60 m Camera: 474 m 44°57'45"N 72… the public to access their property in Access road to the beach in Pine Bluff Estates. a permanent and continuous manner. Instead, the court ruled that a multi-factored balancing test applied to determine whether the access regulation was a taking. A divided panel of 1 of 1 8/18/2021, 7:24 the AM Ninth Circuit Court of Appeals affirmed. The Lake Memphremagog in Crogan v. Pine Bluff Estates. Photo by Jean-Phillipe Supreme Court reversed. Stating Boulet, Creative Commons License 3.0. that the Court’s physical taking jurisprudence is “as old (1)(C) (2020). One morning at 5 a.m., as the Republic,” the Court declared that members of the United Farm Workgovernment commits a physical takers Union entered the strawberry farm ing when it uses its power of eminent run by Cedar Point Nursery. Cedar domain to formally condemn property.

Point employed more than 400 seasonal workers and about 100 full-time The is also true when the government physically takes possession of property workers, none of whom lived on the without acquiring title by, for example, property. Calling through bull horns, occupying property by recurring floodthe union organizers disturbed operaing as a result of building a dam. On tions, causing some workers to join the the other hand, when a government organization in protest and others to regulation restricts an owner’s ability leave the work site altogether. A similar to use his property, a different stanevent occurred at the Fowler Packdard applies. Use restrictions that go ing Company, a grower of table grapes “too far” are regulatory takings, tested and citrus crops, who hired between under a multi-factored, balancing test.

1,800 and 2,500 workers, none living on the property. The two growers The access regulation here appropriates

a right to invade the growers’ property and as such constitutes a per se physical taking. This is so because the regulation grants to the unions the right physically to enter and occupy the land for three hours per day, 120 days per year.

This appropriates land for the enjoyment of a third party and curtails the owners’ right to exclude—a fundamental property right. It was not necessary that the government appropriate a possessory right; the taking of an easement is enough. Nor is this right of access justified on the basis of abating a nuisance, necessity, or protecting the health and safety of the workers. In the Court’s assessment, the government “literally” took access to the property. Cedar Point Nursery v. Hassid, 141 S. Ct. 2063 (U.S. 2021).

TRESPASS: Restaurant customer is not “lawful occupant of real property” entitled to statutory immunity against liability for injury to trespasser. Stroede became violently drunk at the Railroad Station bar. He was ordered to leave and was escorted out of the bar but returned minutes later, still acting combative. Tetting, an employee of the bar but at the time there only as a customer with his family, grabbed Stroede and walked him back to the stairway near the entrance. Stroede fell down the concrete stairs and suffered serious injuries and later filed suit against the bar and Tetting. Tetting claimed protection under Wis. Stat. § 895.529, which immunizes and protects a “possessor of real property” from claims of trespassers for certain conduct. A “possessor of real property” is defined as an “owner, lessee, … tenant, or other lawful occupant of real property.” Id. § 895.529(1)(a). The trial rejected Tetting’s defense. The appellate court reversed, finding Tetting qualified for immunity as a “lawful occupant” based on dictionary definitions of “occupant.”

Stroede appealed, and the supreme court reversed. The majority began its analysis by noting the lack of statutory definition and lack of precedent addressing the meaning of the disputed language. The court looked to Black’s Law Dictionary, which defines

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KEEPING CURRENT PROPERTY

“occupant” in a way that supported the trial court’s conclusion, namely, occupant meant someone who has a possessory right in, or control over, certain property or premises. The court further employed a contextual analysis of the phrasing including the use of the canon ejusdem generis, regarding general words following specific words being construed in light of the specific words.

The court also looked to noscitur a sociis, indicating words are known from their associates. Thus, the court concluded “other lawful occupant of real property” is limited by the words that precede it, meaning the phrase indicates a person with some dominion or control over the property. Tetting, although lawfully present, was not an occupant but a mere invitee, a patron of the business, and thus not entitled to immunity under the statute. Stroede v. Society Ins., 959 N.W.2d 305 (Wis. 2021).

LITERATURE EASEMENTS: In Restating The Law of Prescriptive Easements, 104 Marq. L. Rev. 939 (2021), Prof. John A. Lovett describes prescriptive easements as an important but often overlooked component in the structure of property law. In establishing this property interest, the

element of adversity has proven to be most contested. Courts have developed many presumptions to guide the analysis of the adversity element. Although two of the off-stated presumptions are polar opposites—an otherwise unexplained open and notorious use of another’s land is presumed to have been adverse and such unexplained use is presumed to be permissive—nonetheless, these two presumptions do not express the view held by the majority of courts. Instead, most courts employ a contextualized approach, what Prof.

Lovett calls the Presumption of Adverse Use with Specialized Exceptions (the PAUSE approach), which begins with a presumption of adverse use but then applies counter-presumptions of permissive use in certain circumstances.

The PAUSE approach takes into account local customs, social norms, and issues of neighborly accommodation. Prof.

Lovett urges the reporters currently preparing the fourth Restatement on the Law of Property to adopt the hybrid approach and fashion a rule that mirrors the dominant judicial practice. He supports this position with a review of the persistent debate about the values of recognizing property interests based upon adverse use or possession, finding some merit on each side of the

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issue. Nevertheless, if we are not prepared to abolish prescriptive easements altogether, a rule that is flexible and allows for various presumptions based on things like the character of the property (whether wild or undeveloped) and the status of the parties (whether neighbors or family members), a nuanced rule seems in order. In particular, Prof.

Lovett believes that the neighborly accommodation exception should be narrowed to circumstances in which community custom is well-established.

His assessment of the issues and suggested language for a rule should give the reporters some thought.

LAND USE: In From Smart Cities To Co-Cities: Emerging Legal and Policy Responses To Urban Vacancy, 47 Urb. L. J. 909 (2020), Dan Wu and Prof. Sheila R. Foster offer a case study of Chicago’s Large Lots Program, under which existing property owners can buy up to two vacant residential lots on their blocks for $1 each. In return, these new owners are required to pay property taxes and maintain the property. By the study, the authors explore how local governments can address inequality (from decades of exclusion and discrimination in access to housing) through different uses of vacant land in blighted communities.

They examine the program through the lens of the persistent tension between “use” and “exchange” value in urban development. Though they believe that the Large Lots Program has many merits, they caution that other jurisdictions may lack the ability to replicate the program when land costs are prohibitive.

They offer some financing strategies to overcome these limits.

PROPERTY THEORY: Will Breland, in Acres of Distrust: Heirs Property, the Law’s Role in Sowing Suspicion Among Americans and How Lawyers Can Help Curb Black Land Loss, 28 Geo. J. Poverty Law & Pol’y 377 (2021), attributes much of the loss of land ownership among blacks to the distrust of legal professionals. Negative experiences with the legal system have discouraged families from engaging in estate planning, leading to the destructive

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KEEPING CURRENT PROPERTY

phenomenon of “heirs property,” which divides ownership among cotenants, many of whom are family members who acquire interests through inheritance. Owners are often reluctant to take steps to clear title. The article presents a history of black landholding, including the institutional barriers to ownership and the various legal and structural mechanisms that led to the loss of more than 90 percent of such land in the last century. Alongside the chronicle of landholding among blacks, Mr. Breland claims that the history of racial discrimination by lawmakers and legal practitioners, coupled with a lack of awareness of the past and unscrupulous practices by contemporary attorneys, have created the widespread distrust of the legal system among black landowners. His point is that while staunching the loss of ownership should begin with laws to ensure protection against unfairness and opportunistic conduct, significantly more is needed, in particular, increased awareness of the differing cultural attitudes about family and land when determining property values. To get there, he argues for more cultural competence training for law students and practicing attorneys alike.

LEGISLATION ALABAMA enacts the LIBOR Discontinuance and Replacement Act of 2021. The act provides for the transition away from the London Interbank Offered Rate (LIBOR) to a Benchmark Replacement as selected by a relevant recommending body, including the Federal Reserve, the Federal Reserve Bank of New York, or Alternative Reference Rates Committee. 2021 Ala. Acts 323.

CONNECTICUT adopts the Uniform Commercial Receivership Act. Under the act, a receiver may be appointed before or after judgment to prevent waste or dissipation of the property or its revenue-producing potential. The act specifies the qualifications for receivership and grounds for the removal of receivers. 2021 Ct. Pub. Acts 80.

CONNECTICUT amends real estate brokerage licensing law. The amendments prescribe minimum requirements for education and experience and specify identification requirements for brokerage “teams.”

2021 Ct. Pub. Acts 167.

ILLINOIS amends eviction statute to require foreclosure of certain installment land contracts. If the buyer has paid 80 percent or more of the original purchase price, the seller may recover unpaid amounts only by foreclosure.

The amendment applies to contracts entered into on or after July 1, 1987.

2021 Ill Laws 71.

ILLINOIS amends statute on transfer-on-death deed. The amendments allow a trust, however created, to be a beneficiary, and the property is thereby governed by the terms of the trust. A transfer to a beneficiary or a spouse who attests to the execution of a transfer-on-death deed is void. A surviving spouse may renounce a transfer-ondeath deed and receive one-third of the value of the property. A beneficiary of a transfer-on-death instrument is subject to creditor, administrative, funeral and burial, and statutory claims to the same extent and in the same manner as a beneficiary of a trust that was revocable at the time of the settlor’s death. 2021 Ill. Laws 68.

MARYLAND revises landlord-tenant law on notice required to terminate tenancies. For tenancies for years for a term greater than a week and month-tomonth tenancies, 60-days notice must be given; for tenancies for year-to-year, 90-days notice must be given; and for farm tenancies for year-to-year, 180 days must be given. The amendments do not apply to property in Baltimore and Montgomery Counties with 5 or more dwelling units. 2021 Md. Laws ch.

803.

MARYLAND directs the Legal Services Corporation to provide legal counsel to tenants facing eviction. The law provides the mechanism for providing notice to tenants of the availability

of counsel and community outreach and sets up a task force to study the program. 2021 Md. Laws ch. 746.

NEW YORK amends general obligations law to provide for LIBOR discontinuance. The new provisions replace the London Interbank Offered Rate (LIBOR) with the secured overnight financing rate as the benchmark replacement rate and apply to all contracts governed by New York law, if the parties do not agree otherwise. 2021 N.Y. Laws 94.

OHIO amends lien law to provide for liens for architectural services. The amendments prescribe requirements for filing and perfecting liens for services provided. 2021 Ohio Laws 39.

TEXAS adopts law to authorize land banks. The law authorizes certain municipalities to create a land bank to acquire vacant, deteriorated, abandoned, non-revenue generating, and non-tax producing properties. The land bank may dispose of its properties for productive uses, including affordable housing. A board of directors is established to oversee the land bank. 2021 Tex. Sess. Laws ch. 780. n

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istockphoto

Asymmetrical Conservatorship Litigation

T

he financial burden of litigation involving the establishment of conservatorships is imbalanced.

The person whose care and well-being presumably are the motivating factors compelling the litigation bears most, if not all, of that substantial burden.

For other kinds of litigation, each party usually pays its own attorney fees.

Through that symmetrical relationship, the parties equally face the possibility of financial exhaustion. For conservatorships, however, the conservatee frequently must pay the attorney fees for all of the parties embroiled in the litigation. In the context of this article, the term “proposed conservatee” may perhaps be technically more precise.

As a matter of linguistic convenience, John H. Sugiyama, a retired California state court judge, is an arbitrator and mediator at JAMS. He may be reached at jsugiyama@ jamsadr.com.

however, “conservatee” will be used.

Given that asymmetrical relationship, the parties can subject the conservatee to collectively imposed financial ruin.

Conservatorship litigation thus cries out for early neutral evaluation followed by mediation. A neutral evaluator can describe, and answer questions about, the nature of the conservatorship process and an assessment of the possible consequences of a conservatorship not being granted. In this article, the benefits to be derived from the invocation of such alternative dispute resolution processes will be addressed.

The discussion will center on procedures followed in California. There, the terms “conservatorship” and “conservatee” are used. In other states, many of the same practices likely will be encountered, but the terminology may be different, with the principal terms being “adult guardianship” and “adult ward.” For ease of reference in

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By John H. Sugiyama

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November/December 2021

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this article, California’s terminology and statutory scheme will be used.

Burdens Imposed A conservatorship presumably serves to benefit the conservatee, the person who is the subject of the process. Someone, often a relative, but sometimes a friend or a public guardian, may perceive that the conservatee no longer has the capacity to make informed medical or financial decisions or is subject to undue influence by others who may seek to take advantage of her. Once the process is initiated through the filing of a petition for temporary conservatorship and a related petition for general conservatorship, however, the conservatee, or her estate, will be confronted with a daunting array of expenses, even before any substantive care is provided.

Even if the petitions are uncontested, the court will appoint a guardian ad litem (G.A.L.) or counsel for the conservatee. As a predicate requirement, the appointment of a G.A.L. should not be confirmed until a finding of the conservatee’s lack of capacity has been made.

Also, the G.A.L. could conceivably retain her own counsel. Thus, to avoid these potential issues, some courts may prefer instead to appoint counsel under California Probate Code § 1470(a).

In so doing, the court may order the conservatee’s estate to pay the fees of appointed counsel pursuant to California Probate Code § 1470(c)(1).

The court additionally could order a neuropsychiatric or psychological evaluation of the conservatee, as well as a separate geriatric care assessment. The conservatee’s estate presumably could be charged with the fees billed by the neuropsychiatrist or psychologist, and the geriatrician. Cal. Prob. Code § 2640.

Although the costs of such evaluations will vary from state to state and from jurisdiction to jurisdiction, fees in the range of $2,500 to $5,000 for single reports may be expected. Furthermore, the conservatee’s estate will be obligated to pay the attorney fees incurred by the party that filed the uncontested petitions for temporary and general conservatorship. Id. Again, although billing rates will vary, fees of $375 to

Well-meaning participation by friends and family early in the process may inadvertently significantly increase the financial cost burden on the conservatee.

$500 an hour or even higher should be expected. These rates are drawn from just one predominantly urban county in California. They obviously will vary from county to county and state to state. They will, however, only increase over time.

Rather than request her own appointment, the petitioning party has the option of seeking the appointment of a professional fiduciary to serve as the temporary conservator and later as the general conservator of both the conservatee’s person and estate. If appointed, the professional fiduciary in turn routinely will retain counsel. The conservatee’s estate will bear the fees charged by the professional fiduciary and counsel. Id. The fees charged by the former can amount to several hundred dollars each month. The fees charged by the latter likely will be in the same range as the rates charged by attorneys for any petitioning party.

As may be discerned, the conservatee’s estate may face substantial financial commitments even before any substantive care is provided. The depletion of assets will be accelerated if other parties choose to contest various facets of the conservatorship.

Sources of Conflict Conflicts may arise over the establishment of a conservatorship in at least two different situations. In one— whether a conservatorship is warranted at all—the immediate financial impact, although unintended, may become significant if not addressed at the outset of the proceeding. In the other —disagreement about the specifics of the conservatorship—the longerterm financial consequences, perhaps unappreciated, will become devastating if not also addressed early in the proceeding.

Disagreement about whether a conservatorship is warranted and wellmeaning participation by friends and family early in the process may inadvertently significantly increase the financial cost burden on the conservatee. Often an elderly person who has lived alone in a community may eventually begin to experience a cognitive decline. At this point, a relative or several working together may seek to establish conservatorships of the person and estate for the elderly person.

The elderly person, perceiving her situation differently from the relatives or perhaps being incapable of recognizing her declining mental capacity, may seek help from friends.

As often occurs, the friends may appear at the initial hearing on the temporary conservatorship to express some level of concern on behalf of the elderly person. Their interest may range from expressions of bewilderment about the nature of the process to pronouncements of an intent to object on behalf of the elderly person. The court, protective of the integrity of its processes, likely will continue the matter, giving the friends an opportunity to formalize any objections in writing and to retain counsel if desired.

That very process, although appropriate and perhaps unavoidable, will increase the financial burden borne by the conservatee’s estate if the friends persist through multiple hearings before having their concerns allayed.

From hearing to hearing, the attorneys for the petitioning party and the conservatee will continue billing at their

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November/December 2021

standard rates, totaling between them hundreds of dollars just for each continued hearing.

Under these circumstances, the conservatee, the relatives, and the friends would benefit from early neutral evaluation, most obviously to stop the financial toll on the conservatee’s estate.

A neutral evaluator can describe, and answer questions about, the nature of the conservatorship process. Often such discussions devolve into an assessment of the consequences of a conservatorship not being granted. Medical care could be impaired because of privacy restrictions imposed on physicians.

Financial assets could be mismanaged because of yet other privacy restrictions imposed on financial institutions. Oversight of the medical and financial needs of the conservatee by the court and its investigative staff would not occur.

A more difficult situation arises, with the probability of an even greater financial burden being imposed, when relatives, often adult children or siblings of the conservatee, disagree about various facets of a conservatorship and choose to litigate their different positions. For ease of reference, these

relatives will simply be called parties.

The parties may be prompted to act by an array of perceptions: • That a conservatorship is unnecessary because the conservatee suffers from no cognitive decline.

• That a conservatorship is unnecessary because less costly alternatives, such as a durable power of attorney and an advanced health care directive, have been duly executed.

• That, although a conservatorship may be necessary, a different party from the one nominated in the moving petitions should serve as the conservator.

• That, although a conservatorship may be necessary, a professional fiduciary rather than a party should serve as the conservator.

In acting on these perceptions, the parties may also be motivated by other interests that often are financially related. They may be apprehensive that the nominated conservator may misuse or misappropriate the conservatee’s financial assets or that that person will be able to conceal earlier acts of misuse or misappropriation. They may also be concerned that the nominated conservator lacks the ability to manage the

conservatee’s financial assets prudently and that that person will dissipate those resources precipitously.

The parties may initially believe that their concerns and interests will be vindicated through a trial. As litigation becomes prolonged, however, they may begin to doubt whether a trial will result in a satisfactory outcome. They may come to understand that the court may render a decision that will not match their expectations.

Also, at some moment, the parties may learn that the fees billed by all counsel could conceivably be paid through the conservatee’s estate if their services are deemed to have been performed in the best interests of the conservatee or facilitated the appointment of a conservator. Cal. Prob. Code § 2640.1(a), (c)(1); see Estate of Moore, 258 Cal. App. 2d 458, 461–62 (1968).

They thus may realize that their familial dispute will result in the depletion of assets available for the conservatee’s care. They also may then grasp that an indirect consequence of prolonged litigation will be a diminution of their potential inheritance upon the death of the conservatee.

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November/December 2021 25

If a state does not have a provision comparable in effect to California Probate Code § 2640.1, the conservatee’s estate may not necessarily be obligated to pay the attorney fees of the parties involved in establishing the conservatorship. Nevertheless, the fees generated by the conservatee’s counsel and any expert witnesses retained on her behalf will still become substantial if litigation becomes prolonged.

Benefits of Early Mediation The unpredictability of a totally satisfactory trial result and the certainty of a reduction in any future inheritance should make relatively early mediation appealing to the parties. Counsel would also benefit from such mediation for different reasons.

First, counsel should not accept any fees from any party without prior judicial review and approval. See Cal. Prob.

Code § 2640(a)(3). In some counties, this requirement may not be strictly enforced, leaving unreviewed retainers amounting to several thousand dollars.

Nevertheless, the court may eventually become aware of the improper acceptance of fees if reimbursement of the retainer as well as an award of additional fees is sought from the conservatee’s estate. In such instance, the court may both order the return of the retainer and grant a lesser amount of fees to be paid from the conservatee’s estate. Through mediation, counsel could seek to negotiate the amount of fees that will be paid, without involving the court.

Second, counsel who insist on proceeding to trial may face belated criticism from the parties when the latter become aware of the full extent of the financial burden that could be imposed on the conservatee’s estate. See id. § 2640.1. Again, mediation would provide counsel with a forum through which the parties could be informed about the anticipated legal fees and the source of their payment. This process of collective discussion by the parties about the financial impact of their litigation can eliminate criticism directed

The unpredictability of a totally satisfactory trial result and the certainty of a reduction in any future inheritance should make relatively early mediation appealing to the parties.

at counsel, particularly because the attorney fees incurred will increase from several thousand dollars for an uncontested conservatorship to perhaps over $100,000 for one that is decided through trial.

Apart from the financial savings, the parties themselves would benefit in additional ways by pursuing mediation.

They may have doubts about the fitness of any one of their own to serve as a responsible conservator. Nevertheless, if forced to decide after trial, the court could be constrained to choose a family member rather than a professional fiduciary to serve as the conservator.

Id. § 1812(b), (c); see Conservatorship of Ramirez, 90 Cal. App. 4th 390, 399–400 (2001). The rationale for such selection is that the court has the duty to manage the conflict between family members, who have statutory priority of appointment. Mediation, however, would allow the parties to avoid any uncertainty

about which conservator will be chosen to serve. As a compromise, they could agree on the appointment of a professional fiduciary. They could also devise a process for removal of the professional fiduciary should any concerns about performance arise.

The parties could also use mediation for resolving other disputes over the care of the conservatee that may not be included in any court decision. Visitation schedules, access to health care information, and financial accountings are sources of conflict. Each of these matters could be addressed through mediation.

Moreover, some parties may perceive that the conservatee’s operative estate plan was executed when she lacked capacity or was subjected to undue influence. To avoid separate estate or trust litigation that unavoidably would impose thousands of additional dollars in legal fees, they, with the concurrence of the G.A.L., could address that matter through the conservatorship mediation.

They conceivably could negotiate the filing of a petition for substituted judgment that could restore the estate plan to terms that protect the interests of the conservatee and her intended beneficiaries. See Cal. Prob. Code §§ 15400 et seq.

To mitigate the possibility of ongoing conflict, they could also agree to terms that would restrict any subsequent efforts to modify their agreed-upon estate plan.

The parties thus could act creatively to craft a comprehensive, confidential resolution of their conservatorship dispute. The asymmetrical nature of trial-directed conservatorship litigation will be brought into greater balance.

The financial burden that would be wreaked on the conservatee’s estate will be substantially reduced. More critically, the emotional toll that would be inflicted on the conservatee and those concerned with her health and wellbeing will be avoided. Early neutral evaluation and mediation accordingly should be viewed as the principal, not the alternative, processes for the resolution of conservatorship disputes. n

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He helped us find our son’s calling. It was as plain as the nose on his dog’s face.

I was worried my son lacked direction. Doug said he just needed to find his passion and suggested we all three meet for lunch at an outdoor café and chat. My son brought his rescue dog Max. Doug had brought a dog biscuit for Max and when he saw how well trained Max was, he recognized my son’s true passion: working with rescue dogs. Doug connected him with a local rescue organization. A few years and my son is running the whole outfit. Doug saw something bigger in my son because he was paying attention to the little things.

— Ashley, Los Angeles

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All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written the American Association. $10 MILLION MARKETABLE SECURITIES AND/OR LIQUID ASSETS REQUIRED. Investment and Wealth Management Services are provided by Whittier Trust Company and The Whittier Trust consent Company ofofNevada, Inc. (referredBar to herein individually and collectively as “Whittier Trust”),

November /December state-chartered trust companies wholly 2021 owned by Whittier Holdings, Inc. (“WHI”), a closely held holding company. This document is provided27 for informational purposes only and is not intended, and should not be construed, as investment, tax or legal advice. Past performance is no guarantee of future results and no investment or financial planning strategy can guarantee profit or protection against losses. All names, characters, and incidents, except for certain incidental references, are fictitious. Any resemblance to real persons, living or dead, is entirely coincidental.

KEEPING CURRENT P R O B AT E CASES ACCEPTANCE OF BENEFITS: Contest barred by acceptance of benefits even if less than amount receivable upon a successful contest. The executor distributed to a child of the testator a mutual fund account specifically bequeathed to the child. The child assumed ownership of the account and five months later sued to set aside the will alleging undue influence by the executor, another child of the testator. The executor moved to dismiss for lack of standing and the trial court agreed because accepting a benefit under the will prevents the beneficiary from attacking the will’s validity. The intermediate appellate court reversed, holding that the child was not estopped because the benefit accepted was worth less than what the child would receive if the suit were successful. On appeal by the executor, the Texas Supreme Court reversed in Estate of Johnson, 64 Tex. Sup. Ct. J. 1160 (Tex. 2021), holding that the application of the acceptance of benefits doctrine does not depend on the value of the interest accepted under the will.

EXECUTOR POWERS: Statutory powers authorized the executor to convey property devised to a trust.

In Lockhart v. Chisos Minerals, LLC, 621 S.W.3d 89 (Tex. App. 2021), a Texas intermediate appellate court held that the terms of a will giving the executor all the statutory powers given to a trustee authorized the executor to convey the real property of the estate that passes under the residuary devise to an existing trust for consideration.

Keeping Current—Probate Editor: Prof.

Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409; gwb@ ProfessorBeyer.com. Contributors: Claire G. Hargrove, Paula Moore, Prof. William P. LaPiana, and Jake W. Villanueva.

to “any beneficiary” also applies to the settlor who is the sole life beneficiary.

Keeping Current—Probate offers a look at selected recent cases, literature, and legislation.

The editors of Probate & Property welcome suggestions and contributions from readers.

Therefore, the executor, who was also the trustee of the trust, could not challenge the validity of the deed on the grounds that the executor had not signed the deed in a trustee capacity.

LAPSE: Devise to charity does not lapse so long as the charity is in existence when the testator died. The testator’s will made a devise to a nursing home operated as a charity under IRC § 501(c)(3). At the time of the testator’s death, the nursing home was a party to an agreement with a for-profit entity to transfer its operations and licenses to the entity once a new facility was completed. After filing estate tax returns identifying the devise as a charitable gift, the executor petitioned for construction of the will. The trial court agreed with the executor that the devise had lapsed because the nursing home was no longer operating as a charity at the time of the testator’s death. On appeal, the Supreme Court of Nebraska in In re Estate of Akerson, 960 N.W.2d 719 (Neb. 2021), reversed because the nursing home was operating as a charity on the date of the decedent’s death and thus the agreement was irrelevant.

NO-CONTEST CLAUSE: No-contest clause applies to a settlor who is a trustee. In its opinion in McMurtrie v. McMurtrie, No. 200404, 2021 WL 1569396 (Va. Apr. 22, 2021), the Supreme Court of Virginia held that a no-contest clause in a trust that applies

TORTIOUS INTERFERENCE: A plaintiff must prove the defendant’s knowledge of the plaintiff ’s expectations. The defendants in a suit alleging tortious interference with inheritance won their summary judgment motion because the trial court agreed that the plaintiffs had not presented evidence to create a sufficient dispute of a material fact, that is, whether the defendants had knowledge of any inheritance the plaintiffs expected. The plaintiffs appealed and the Supreme Court of Iowa affirmed in Buboltz v. Birusingh, 962 N.W. 2d 747 (Iowa 2021), holding that an element of the cause of action is the defendant’s “purpose to interfere with the plaintiff ’s expectancy,” citing Restatement (Third), Torts: Liability for Economic Harm, § 19, and stating that purpose to interfere requires knowledge of the expectancy.

TORTIOUS INTERFERENCE: Denial of an undue influence claim prevents bringing action based on tortious interference. The decedent’s surviving spouse challenged the admission to probate of the decedent’s will alleging undue influence by the decedent’s child from a prior marriage and the decedent’s attorney. After an evidentiary hearing, the probate court dismissed the objections, finding there was insufficient evidence of undue influence, and admitted the will to probate. The surviving spouse then brought an action against the child and the attorney alleging tortious interference with inheritance and with contractual relations regarding revision of a pre-nuptial agreement. The trial court granted the defendants’ motion for summary judgment. On appeal, the Connecticut intermediate appellate court in Solon v. Slater, 253 A. 3d 503 (Conn. App. 2021), affirmed, agreeing

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that the action was barred by collateral estoppel because the probate court decision had already fully addressed the same allegations in disposing of the undue influence claim.

TRUST PROTECTOR: Trust protector’s action voided by indirect undue influence. In its opinion in Matter of ABB Trust, 491 P.3d 1120 (Ariz. Ct. App. 2021), an intermediate Arizona appellate court held that Ariz. Rev. Stat. § 14-10406, which makes void a trust “to the extent its creation was induced by fraud, duress or undue influence” (identical to UTC § 406), means that a person alleged to have exercised undue influence to procure an amendment of a trust need not exercise undue influence directly on the person authorized to amend the trust. The court, therefore, reversed the dismissal of the suit and remanded for trial to determine if a trust protector amended a trust because of pressure from the settlor who was in turn subjected to undue influence by the settlor’s spouse.

TAX CASES, RULINGS, AND REGULATIONS ESTATE TAX: Marital deduction allowed because marriage was considered valid by a foreign country. Over several decades, the decedent had married three women. Before his death, a New York court declared the decedent’s divorce in Mexico of his first marriage invalid and his marriage to his second wife null and void. Then decedent obtained a religious divorce for the first marriage under rabbinical law in New York. The decedent then traveled to Israel and married his third wife in an Orthodox Jewish ceremony without obtaining a divorce of the first marriage in a US state court. The Israeli marriage certificate noted that the decedent was free to marry because he was divorced. Upon the decedent’s death, he left the bulk of his estate to his third wife. The US government denied the marital deduction claimed by his estate stating the first wife was the decedent’s wife at death, his divorce was not valid, and accordingly, the property did not

pass to the decedent’s third spouse.

In Estate of Grossman v. Commissioner, 121 T.C.M. 1492 (2021), the Tax Court held the issue under the Tax Code was whether the third marriage was valid, not whether the religious divorce was valid. New York law uses the place of celebration test to evaluate the legality of a marriage. Because Israel recognized the marriage as valid, it was a valid marriage under New York state law and the estate could claim the marital deduction.

TRUSTS: A taxpayer may pursue a claim for improper levy only against the IRS, not the custodian of the funds. A family trust named the taxpayer as a beneficiary and held two accounts at a bank. The IRS issued two levies upon the bank, naming the taxpayer. The bank transferred the amount of funds identified in the levies from the trust into a suspense account. Later, when the taxpayer disputed the levies, the bank transferred the funds to a state court register. The trustee brought suit against both the United States and the bank. The trustee argued that the IRS had improperly levied and the funds should not have been turned over. In Newman v. Santander Bank, N.A., No. 20-10632-FDS, 2021 WL 2900986 (D. Mass. July 9, 2021), the court held that the taxpayer could not sue the bank for breach of contract, conversion, or unfair trade practices under state law. It noted that a bank must comply with a notice of levy unless it is not in possession of the taxpayer’s property or the property is subject to a prior judicial attachment or execution. The bank has no liability for its surrender of property under the levy and is held immune from taxpayer claims stating the property was improperly released.

LITERATURE ABATEMENT: Mark R. Siegel argues that abatement of a decedent’s property to pay debts and other expenses should encompass non-probate assets in Extending Abatement to Non-Probate Succession, 13 Est. Plan. & Comm. Prop.

L.J. 487 (2021).

CALIFORNIA—CONSERVATORSHIPS: In her Comment, It’s Mom’s Money and I Want It Now: A Review of Whether the Conservatee Should Continue to Pay the Attorney Fees of Feuding Parties, 52 U. Pac. L. Rev. 963 (July 2021), Julianna Wright examines the current California Probate Code and the California Rules of Court and proposes an amendment that limits the circumstances under which the conservatee’s estate pays attorney fees. Her proposed amendment underscores the idea that the conservatee’s estate is no longer responsible for paying all attorney fees in a disputed conservatorship case.

ESTATE LITIGATION: In their Note, Wealth Transfer Tax Planning After the Tax Cuts and Jobs Act, 46 B.Y.U. L. Rev. 1411 (2021), John A. Miller and Jeffrey A. Maine discuss the repercussions associated with keeping an estate open for a prolonged period and examine whether keeping an estate in litigation violates the testator’s intent.

GRANTOR TRUSTS: In Implications of Termination of Grantor Trust Status, 13 Est. Plan. & Comm. Prop. L.J. 443 (2021), Arielle M. Prangner provides “a resource to highlight issues that require consideration when termination of grantor trust status has occurred, is being contemplated, or is foreseeable.”

GUARDIANSHIP: In her Comment, Don’t You Know That Your Law Is Toxic?

Britney Spears and Abusive Guardianship: A Revisionary Approach to the Uniform Probate Code, California Probate Code, and Texas Estates Code to Ensure Equitable Outcomes, 13 Est. Plan. & Comm. Prop. L.J. 587 (2021), Lisa Zammiello “proposes improvements to existing laws and argues the need for supportive services to ensure equitable enforcement of protective laws.”

HEIR HUNTING: In Heir Hunting, 169 U. Pa. L. Rev. 383 (2021), David Horton illuminates a mysterious corner of succession law by reporting the results of the first empirical study of heir hunting. Its centerpiece is a hand-collected dataset of 1,349 recent probate matters from San Francisco County, California.

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ILLINOIS—GUARDIANS AD LITEM: In Guarding the Guardians: Should Guardians ad Litem Be Immune from Liability for Negligence?, 51 Loy. U. Chi. L.J. 1001 (2020), Alberto Bernabe explores the issue of whether guardians ad litem should be subject to liability and whether the Illinois Supreme Court reached the correct result in Nichols v.

Fahrenkamp, concluding that although the facts before the court did not quite support the court’s conclusion, the court made some good suggestions that may help clarify this area of the law in the future.

ILLINOIS—TRUSTS: Susan Bart provides an analysis of how to determine the trust beneficiaries who have more rights than remote beneficiaries in Who Are My Qualified Beneficiaries, Ill. B.J., May 2021, at 26.

INTESTATE SUCCESSION: Megan Doherty Bea and Emily S. Taylor Poppe use the concept of marginalized legal categories to describe how the law disadvantages individuals and groups by transforming inherently ordered social classifications into consequential legal categories employing intestacy laws as an illustration in Marginalized Legal Categories: Social Inequality, Family Structure, and the Laws of Intestacy, 55 Law & Soc’y Rev. 252 (2021).

IOWA—IRREVOCABLE TRUSTS: In his Note, A Changing World Calls for Iowa to Apply the Alter Ego Doctrine to Irrevocable Trusts, 106 Iowa L. Rev. 1477 (2021), Patrick K. Kenney argues that Iowa should regulate this application of the alter ego doctrine through statute, thus limiting judicial discretion and allowing citizens of Iowa to understand the law regarding irrevocable trusts while using them.

KANYE WEST: In An Estate Plan for Kanye West, 39 Cardozo Arts & Ent. L.J. 195 (2021), Thomas E. Simmons proposes a noncharitable purpose trust as a means by which Kanye West’s right of publicity can be safeguarded and appropriately exploited.

MARIJUANA TRUSTS: Brandy M. Parry’s Note, Puff, Puff, Pass: How State Marijuana Laws May Impact Probate Courts and Lead to Liability, 33 Quinnipiac Prob. L.J. 178 (2020), focuses on the potential liability surrounding the passing of marijuana from the decedent to a beneficiary, pointing out that liability may extend not only to the beneficiary but also to the executor and probate judge tasked with the administration of the estate. She proposes creating a marijuana trust as a possible solution to keep assets out of the probate system and limit the potential liability for beneficiaries.

PASS-THROUGH ENTITIES: Kelly M. Perez “examines Estate of Jones v. Commissioner, provides a brief historical context of the opinions that consider tax-affecting in prior Tax Court and Federal Circuit Court opinions, reviews current trends in determining FMV for transfer tax purposes, and offers several key observations, specifically in light of the current economic climate with COVID-19” in Keeping Up With the Joneses: A Fresh Perspective on TaxAffecting, 13 Est. Plan. & Comm. Prop. L.J. 417 (2021).

TAXATION FOR COHABITANTS: Keeva Terry proposes a theory for the taxation of nonmarriage in Divorce Without Marriage: Taxing Property Transfers Between Cohabiting Adults, 89 U. Cin. L. Rev. 882 (2021), advocating for the adoption of an interdisciplinary approach that incorporates family law principles that more fully recognize the changing landscape of the American family.

TAXATION: Hale E. Sheppard explains international obligations that can trigger significant liabilities by examining recent cases where the government pursued liabilities from surviving spouses, executors of estates, trustees, distributees, and fiduciaries. In Neither Death nor Distance Erases the Issues: IRS Actions Against Deceased or Absconding Taxpayers, 31-JUL J. Multistate Tax’n 06 (July 2021), he identifies the main tools available to the IRS, DOJ, and district courts

in international tax collection cases, and analyzes the use of Repatriation Orders over time.

TESTAMENTARY CAPACITY: In The Dilemma of an Aging Population: Evaluating the Treatment of Insane Testators in the Modern Probate Process, 13 Est. Plan. & Comm. Prop. L.J. 389 (2021), Ryan F. Bender evaluates two critical estate planning topics: (1) “the current state of judicial treatment of insane testators in probate and the potential for admitting extrinsic evidence in will contests to improve the protection of testators” and (2) the deductibility of conditional donations to nonprofit organizations and possible policy changes to deductibility in the case of restricted gifts.

TESTAMENTARY SCHEMES: In The Secret Life of Testamentary Schemes, 68 Drake L. Rev. 85 (2020), Richard F. Storrow reveals that testamentary schemes enable a probate court to declare a will’s language plain even when the will suffers from significant omissions in its dispositive provisions. He contends that, as a device that ensures a certain elasticity in the interpretation of wills, testamentary schemes have enabled wills to retain their vitality when the passage of time has rendered their provisions obscure or obsolete.

TEXAS—CONTINGENT REVENUE: In her Comment, Dividing the Intangible: An Examination of Community Property in a World of Contingent Revenue, 13 Est. Plan. & Comm. Prop. L.J. 547 (2021), Mariana Pedroza “calls on the Texas legislature to hold this unique form of revenue as separate property at the time of divorce, giving post-divorce protection to those individuals that seek to retain creative control of their works,” such as those created by social media influencers.

TEXAS—POSTHUMOUS CONCEPTION: In her Comment, A Piece of You and I: Posthumous Conception and its Implications on Texas Estates Law, 13 Est. Plan. & Comm. Prop. L.J. 509 (2021), Alexis C. Mejia discusses “whether

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children conceived posthumously are considered beneficiaries of a deceased parent’s estate under the current Texas Estate Code.”

TRANSGENDER HEIRS: By acting in advance of a future matter of first impression, Carla Spivack proposes to unlock the law’s expressive potential and use its norms to create space within it for change by arguing that inheritance law can play an expressive role by presumptively pulling transgender heirs into the notional matrix of what constitutes “family” for inheritance purposes in The Dilemma of the Transgender Heir, 33 Quinnipiac Prob. L.J. 147 (2020).

UNIFORM PROBATE CODE: Richard C. Ausness contends that some of the 1990 UPC’s sections are unnecessarily confusing and complex, while others seem excessively vague and openended. In These Are a Few of My Least Favorite Things, 34 Quinnipiac Prob. L.J. 231 (2021), he identifies some of the worst offenders and suggests ways to improve them.

VIDEO ADVANCE DIRECTIVES: In Video Advance Directives: Growth and Benefits of Audiovisual Recording, 73 SMU L. Rev. 163 (2020), Thaddeus Mason Pope makes the case for video advance directives as a valuable, additional way for individuals to record their health care treatment preferences.

WYOMING—HOLOGRAPHIC WILLS: The application of Wyoming’s holographic will statute creates harsh outcomes when a testator fails to strictly comply with its requirements according to Birney Brayton and Krystle Somers. In Let the Author Do the Talking: Why Wyoming’s Holographic Will Statute Does Not Currently Give the Testator Final Say, 21 Wyo. L. Rev. 371 (2021), they propose two possible solutions to help Wyoming courts reach more equitable outcomes that will better achieve a testator’s intent and further validate homemade wills executed by Wyoming residents.

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The authors examine commercial leasing for restaurants and franchise operations from both tenant and landlord perspectives, as well as from a franchisor perspective for franchises, and discusses leases for in-line, outlot and urban settings. This book also provides valuable, practice-tested restaurant leasing clauses and agreements for franchise operations.

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LEGISLATION COLORADO amends the Colorado Uniform Trust Code to govern spendthrift and discretionary trusts. 2021 Colo. Legis. Serv. Ch. 170.

COLORADO enacts the Uniform Fiduciary Income and Principal Act. 2021 Colo. Legis. Serv. Ch. 143.

COLORADO prohibits discrimination against a potential organ transplant recipient because of the person’s disability. 2021 Colo. Legis. Serv. Ch. 99.

COLORADO regulates the conversion of human remains to basic elements within a container using an accelerated process. 2021 Colo. Legis. Serv. Ch. 123.

DELAWARE provides that a beneficiary of a discretionary trust has a mere expectancy rather than a property right.

2021 Del. Laws Ch. 69.

FLORIDA adopts the Uniform Directed Trust Act. 2021 Fla. Sess. Law Serv. Ch. 2021-183.

GEORGIA prohibits discrimination against a potential organ transplant recipient because of the person’s physical or mental disability. 2021 Ga. Laws Act 244.

HAWAII enacts the Uniform Trust Code. 2021 Haw. Laws Act 32.

ILLINOIS enacts the Electronic Wills and Remote Witnesses Act. 2021 Ill. Legis. Serv. P.A. 102-167.

ILLINOIS updates its Residential Real Property Transfer on Death Instrument Act. 2021 Ill. Legis. Serv. P.A. 102-68.

LOUISIANA adopts the Uniform Transfer on Death Security Registration Act. 2021 La Sess. Law Serv. Act 167.

MAINE passes the Uniform Trust Decanting Act. 2021 Me. Legis. Serv. Ch. 235.

MARYLAND authorizes electronics wills, powers of attorney, and advance directives. 2021 Md. Laws Ch. 686.

FLORIDA creates an elder-focused dispute resolution process. 2021 Fla. Sess.

Law Serv. Ch. 2021-67.

MARYLAND provides enhanced protection against the financial exploitation of susceptible adults and older adults. 2021 Md. Laws Ch. 311.

FLORIDA passes the Community Property Trust Act. 2021 Fla. Sess. Law Serv.

Ch. 2021-183.

MARYLAND regulates the custodianship and disposal of original wills. 2021 Md. Laws Ch. 513.

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MONTANA prohibits discrimination against a potential organ transplant recipient because of the person’s disability. 2021 Mont. Laws Ch. 487.

NEBRASKA enacts the Uniform Powers of Appointment Act. 2021 Neb. Laws L.B. 501.

NEVADA prohibits discrimination against a potential organ transplant recipient because of the person’s disability. 2021 Nev. Laws Ch. 244.

NEVADA updates laws governing electronic wills and trusts. 2021 Nev. Laws Ch. 209.

NORTH CAROLINA allows the judicial establishment of the validity of a revocable trust during the settlor’s lifetime. 2021 N.C. Laws S.L. 2021-53.

NORTH CAROLINA prohibits discrimination against a potential organ transplant recipient because of the person’s disability. 2021 N.C. Laws S.L. 2021-64.

OREGON authorizes body disposition via alkaline hydrolysis. 2021 Or. Laws Ch. 296.

OREGON provides a comprehensive form for advance directives for health care. 2021 Or. Laws Ch. 328.

RHODE ISLAND prohibits discrimination against a potential organ transplant recipient because of the person’s disability. 2021 R.I. Laws Ch. 21-133.

TENNESSEE prohibits discrimination against a potential organ transplant recipient because of the person’s disability. 2021 Tenn. Laws Pub. Ch. 441.

TEXAS expands the Rule Against Perpetuities period to 300 years for trusts, but a real property asset cannot be restricted for more than 100 years.

2021 Tex. Sess. Law Serv. Ch. 792. n

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Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

November/December 2021 33

An Introduction to Community Property Trusts

By Michael A. Sneeringer

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O

Getty Images

n June 29, 2021, Governor Ron DeSantis approved Senate Bill No. 1070, Chapter 2021-183.

Contained within this bill was the Community Property Trust Act, Florida Statutes Sections 736.1501–151.

Florida is now the latest state to allow community property trusts. Other states allowing community property trusts include Alaska, Kentucky, South Dakota, and Tennessee.

Michael A. Sneeringer is a partner in the Naples, Florida, office of Porter Wright. He is Probate & Property’s Articles Editor for Trust and Estate and the group chair of the ABA RPTE Section’s Non-Tax Estate Planning Considerations Group.

What is community property, and why is community property important?

Instead of being purely community property law states, some states address community property through the allowance of trusts or the enactment of the Uniform Disposition of Community Property Rights at Death Act (UDCPRDA). What is a community property trust, and why is a community property trust important? What is UDCPRDA? Why would Florida (or any other nontraditional community property state) enact community property trust legislation? This article addresses basic questions related to community property and the use of community property trusts.

[Community property] rights are vested in each spouse at the time the asset is acquired. The vesting occurs even if title is held in the name of just one spouse. In other words, taking title in the name of one spouse does not override the community property nature of an asset.

Compare that immediate vesting with the situation in a traditional common law marital property state. . . . In common law marital property states, the rights to property acquired in the name of one spouse during a marriage may ultimately be divided between the spouses, but such property right for the spouse who is not the owner of record does not become vested until the right is determined by a court in a dissolution action; or at death, through inheritance or by application of an elective share action. The spouse who is not the owner of record does not have a vested property right at the time of the acquisition of the asset.

istockphoto

What Is Community Property, and Why Is It Important?

Wisconsin, Washington, Texas, New Mexico, Nevada, Louisiana, Idaho, California, and Arizona are traditional community property states. In these

“traditional” community property states, assets acquired by a married couple during a marriage, other than through gift or inheritance, belong to both spouses as equal undivided interests.

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See Willliam D. Brewer & Nicholas M. Frost, Community Property in Oregon: Advising Couples Transitioning from a Community Property State to Oregon at 3, Presented to the Eugene-Springfield Tax Association (Apr. 30, 2013).

Under section 1014(b)(6) of the Internal Revenue Code of 1986, as amended (Code), property shall be considered to have been acquired from or to have passed from the decedent, which represents a surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any state, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross estate. See I.R.C. § 1014(b). This means that “[u]nder federal income tax law, all community property (including both the decedent’s one-half interest in the community property and the surviving spouse’s one-half interest in the community property) receives a new basis at the death of the first spouse to die equal to its fair market value.”

Philip J. Hayes & Nicole M. Pearl, Community Property Issues in Estate Planning, Telephone Seminar/Audio Webcast, TSVB30 ALI-ABA 1 (Feb. 27, 2014). For tax purposes, section 1014(b)(6) of the Code is important because the surviving spouse of a marriage will receive a fair market value basis in all community property upon the death of the first spouse. “In contrast, the surviving spouse of a marriage in a common law state will receive a FMV basis only in the property owned by the first spouse to die; the tax basis of property owned by the surviving spouse is unaffected by the death of the other spouse.” See Paul L. Caron & Jay A. Soled, New Prominence of Tax Basis in Estate Planning, 150 Tax Notes 1569 (Mar. 28, 2016).

The following fact pattern illustrates the unequal outcomes in common law states and community property states.

A married couple, Roque and Lori, own appreciated undeveloped land, purchased several years ago, with a current tax basis of $100,000 and a $1 million fair market value. The title to the land is held in their joint names. Roque dies,

The reasoning for choosing the situs of a community property trust boils down to specific provisions aimed at achieving maximum creditor protection for selfsettled community property trusts. and the real estate is sold at year’s end for its $1 million fair market value. In a common law state, section 1014(a) (1) of the Code results in a $550,000 income tax basis to Lori. Roque’s basis in his half of the land increases from the original $50,000 to $500,000 (the date-of-death value). Lori’s basis in her half of the land remains $50,000. The subsequent sale of the land produces a $450,000 gain ($1 million amount realized less $550,000 basis) and a tax liability of $90,000 ($450,000 × 20 percent (20 percent long-term capital gains tax rate)). In a community property state, section 1014(b)(6) of the Code results in a $1 million income tax basis to Lori. In light of that adjustment, the subsequent sale of the land produces zero gain ($1 million amount realized less $1 million basis) and zero tax liability.

What Is a Community Property Trust, and Why Is It Important?

Community Property Trusts, Generally Each of Alaska, Florida, Kentucky, South Dakota, and Tennessee has adopted its own version of community property trust law allowing married couples to choose between community property and the traditional common law approach to marital property.

But unlike Florida, Kentucky, South Dakota, and Tennessee, Alaska allows a

nonresident married couple to choose community property both by setting up a trust with an Alaska resident trustee to make the trust assets community property and by agreement (a community property agreement). Alaska Stat. § 34.77.10 et seq. The Alaska legislature based its statute on the Uniform Marital Property Act. Jonathan G. Blattmachr, Howard M. Zaritsky & Mark L. Ascher, Tax Planning with Consensual Community Property: Alaska’s New Community Property Law, 33 Real Prop. Prob. & Tr. J. 615, 618 (Winter 1999). Under the Alaska, Florida, Kentucky, South Dakota, and Tennessee community property trust laws, an individual needs only to transfer property to a community property trust satisfying the state statute in order to opt into a community property regime with respect to the transferred property.

Especially for residents of non–community property states, the reasoning for choosing among Alaska, Florida, Kentucky, South Dakota, and Tennessee as the situs of a community property trust boils down to specific provisions aimed at achieving maximum creditor protection for self-settled community property trusts; arguably, South Dakota has legislation on point and has a greater asset protection trust ranking according to some attorneys than Alaska and Tennessee (Florida and Kentucky do not have self-settled trust legislation). See discussion in William D. Lipkind & Terry Prendergast, New South Dakota Special Spousal Trust, Steve Leimberg’s Estate Planning Newsl., No. 2433, July 7, 2016, www.leimbergservices.com; Steve Oshins, 11th Annual Domestic Asset Protection Trust State Rankings Chart (Apr. 2020), https://bit. ly/3n3S4ji. But it should be noted that Alaska is an opt-in community property state; a married couple domiciled in Alaska may establish community property by entering into a community property agreement, as opposed to requiring a creation of a trust. Alaska Stat. § 34.77.060. Spouses may pick and choose among their holdings, holding some assets as community property and others as separate property. Id. It should also be noted that community

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property trusts are typically not marketed for creditor protection purposes; instead, the benefits are mainly income tax based (other benefits are discussed below).

Community Property Trusts and Tax Treatment by IRS There are a few uncertainties to consider before preparing a community property trust. A few follow: Harmon and Revenue Ruling 77-359.

During the 1940s, Hawaii, Michigan, Nebraska, Oklahoma, Oregon, and Pennsylvania enacted laws allowing residents to opt in to community property treatment. In Commissioner v. Harmon, 323 U.S. 44 (1944), the Supreme Court ruled that an Oklahoma statute allowing spouses to elect community property under that state’s law would not be recognized for federal income tax purposes. Accordingly, some commentators argue that the IRS may rely on Harmon to disallow the full stepup in basis for community property acquired through an opt-in community property state.

But other commentators believe that Harmon does not affect the community property classification under an optin system. In Revenue Ruling 77-359, 1977-1 C.B. 357, the IRS addressed the tax treatment of community property agreements entered into by a husband and wife residing in the State of Washington (a community property state). It concluded that the conversion of separate property to community property by residents of a community property state would be effective for federal gift tax purposes but ineffective for the transmutation of income from such property. The Ruling, citing Harmon, noted, “[t]o the extent that the agreement affects the income from separate property and not the separate property itself, the Service will not permit the spouses to split that income for Federal income tax purposes where they file separate income tax returns.” Based on this 1977 Revenue Ruling, the IRS may treat the underlying property as community property and not distinguish between elective and default community property regimes.

Due Process. Section 1 of the Fourteenth Amendment of the US Constitution provides, in part, “nor shall any State deprive any person of life, liberty, or property, without due process of law.” A move across state lines arguably cannot deprive a spouse of the vested property rights the spouse has under the laws of community property because there would be no due process to cause the change. Under basic conflict of laws principles, a right belonging to either or both spouses in property is not affected by a change in domicile by the couple to a different state. See Restatement (Second) Conflict of Laws § 259.

Basis Rules. IRS Publication 555 addresses community property and how individuals can figure out their income if they are married, are living in a community property state or country, and file separate returns. Revised in 2020, it does not consider “the federal tax treatment of income or property subject to the ‘community property’ election under Alaska, Tennessee, and South Dakota state laws.” IRS Publication 555: Community Property at 2 (rev.

Mar. 2020). It should be noted that the next time this publication is amended, it will probably state the same thing for Florida and Kentucky. IRS Publication

555 would affect only Alaska’s opt-in community property regime and would not address the efficacy of Alaska community property trusts. The IRS may view these types of community property systems as providing too much flexibility to the taxpayers to opt in and out of community property status and thus that the Alaska-type system is more akin to tax avoidance rather than a state property law system. But no reported cases or IRS rulings have addressed the federal income tax capital gains basis step-up for property held in a community property trust established in Alaska, Kentucky, Tennessee, South Dakota, or Florida.

Opt In vs. Opt Out. Why is it so important that Alaska has an opt-in statute coupled with community property trust legislation? Some attorneys have noted, “[n]o reported cases or IRS rulings have addressed the federal income tax capital gains step-up of basis in property held in an Alaska community property trust or a Special Spousal Trust similar to that permitted in South Dakota.”

Terry Prendergast, South Dakota Special Spousal Property Trusts: South Dakota “Steps-Up” to the Plate and Hits a Home Run for Surviving Spouses, 61 S.D. L. Rev. 431, 433 (2016). An attorney in at least one of the non-opt-in states takes

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the position that because its legislation makes specific reference to community property for purposes of section 1014(b)(6) of the Code, the surviving spouse’s receipt of a 100 percent stepup in basis on the property held in the community property trust by the decedent and the surviving spouse should by respected by the IRS. Id. But just because state legislation highlights a section of the Code does not mean that the IRS will respect such a conclusion.

Further, the author of this article had been a member of a subcommittee within the Florida Bar’s Real Property Probate & Trust Law Section that studied the community property trust legislation issues before the statutory enactment of such trust legislation in Florida. An opt-in statute coupled with community property trust legislation was important to some subcommittee members initially; however, solely community property trust legislation passed. The author observed that without an opt-in approach (or Florida enacting community property legislation like Wisconsin did in 1984), some initial subcommittee members shied away from fully committing to approving community property trust legislation. Their general reasoning: Do

you really have community property under Florida state law if the only way to get it is with a trust arrangement? See also Jeremy T. Ware, Section 1014(b)(6) and the Boundaries of Community Property, 5 Nev. L.J. 704, 730–32 (Spring 2005).

Accordingly, attorneys in Florida, Kentucky, South Dakota, and Tennessee (meaning, non–community property states) who recommend community property trusts to their clients need to properly address the income tax issues of taking non–community property and using a community property trust to create community property.

What Is UDCPRDA? Alaska, Arkansas, Colorado, Connecticut, Florida, Hawaii, Kentucky, Michigan, Minnesota, Montana, New York, North Carolina, Oregon, Utah, Virginia, and Wyoming have all adopted the UDCPRDA. See Disposition of Community Property Rights at Death Act (Unif. L. Comm’n 1971), https://bit.ly/3DPfTSb. Not all states that have introduced this Uniform Act have enacted it. For example, North Dakota failed to enact it in 2017. See N.D. Legis. Branch, Bill Actions for HB 1213, https://bit.ly/3yQHLBK. In

non–community property states, the UDCPRDA preserves “the rights of each spouse in property that was community property before the spouses moved to the non–community property state, unless they have severed or altered their ‘community property’ rights.” Unif. L. Comm’n, Summary, Uniform Disposition of Community Property Rights at Death Act, https://bit.ly/3jHqeHK. Its drafters were specific in limiting its scope: If enacted by a common law state, it will only define the dispositive rights, at death, of a married person as to his interests at death in property “subject to the Act” and is limited to real property, located in the enacting state, and personal property of a person domiciled in the enacting state. . . . By way of illustration, in at least one community property jurisdiction, the wife has no right to dispose of any part of the community property if she predeceases her husband.

If the law of that jurisdiction is construed so as to treat this as a rule of property, then the move to the common law state should not alter the “property interest” of the spouses by conferring a right

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on the wife which she did not previously possess. On the other hand, if the provision is treated as simply establishing a pattern of dispositive rights on death of a wife who predeceases her husband, rather than a property right, the common law state of new domicile could prescribe an alternative pattern of dispositive rights. The Act does not resolve this question; rather it simply makes clear that it does not affect existing “property rights,” leaving to the courts the interpretation of the effect of the community property state’s law.

See Nat’l Conf. of Comm’rs on Unif.

State Laws, Uniform Disposition of Community Property Rights at Death Act at 3, 4 (Feb. 7, 1972), https://bit.ly/3yK81gX. Thus, the UDCPRDA preserves rights coming from the former community property state at death but does not create community property rights in the new state. Currently, the Uniform Law Commission (ULC) is revising and updating the UDCPRDA with the Uniform Community Property Disposition at Death Act (UCPDDA). Unlike UDCPRDA, UCPDDA (1) broadens the UDCPRDA to recognize the non-probate revolution that has occurred over the past 50 years; the 1971 UDCPRDA applied only to probate assets; (2) broadens the UDCPRDA to expressly preserve some rights that spouses would have had in the community property jurisdiction for certain bad faith acts or acts of mismanagement of community property by a spouse, whereas the UDCPRDA “only define[d] the dispositive rights, at death, of a married person as to his interests at death in property” subject to the act; and (3) resolves numerous uncertainties and ambiguities that have arisen over time concerning the specific language of the 1971 UDCPRDA. See Letter from David English to Unif.

The state could consider enactment of community property trust legislation!

What are the benefits? If enactment of community property trust legislation is via a statute, what might that statute look like? Here are some considerations:

The UDCPRDA preserves rights coming from the former community property state at death but does not create community property rights in the new state.

Law Comm’n, Issues Memorandum for Second Reading (June 28, 2021), https://bit.ly/2WSyxrq.

Although the UCPDDA updates UDCPRDA, it too does not create community property rights in the new state.

At present time, the UCPDDA must be reviewed and edited by the ULC, and the official comments finalized. The final act is expected to be published on the ULC website in early October 2021, and state legislatures can expect to begin considering the act for adoption in 2022.

How Might a Non–Community Property State Approach Community Property Trust Legislation?

As previously mentioned, neither UDCPRDA nor UCPDDA creates community property rights in a state that has not enacted community property law. Most states would appear to be too entrenched in non–community property rights to adopt community property. So, if a state is wary about UCPDDA and is not going to adopt community property, how might it address community property rights?

Benefits for States to Consider Here are six benefits to consider.

1. Another Tool in the Practitioner’s Toolbox. So long as the potential issues described above are explained to clients and the clients (and spouses) are counseled on the ethical issues involved in an attorney representing both spouses, allowing clients to transfer property to a community property trust gives them another planning tool. Adoption of community property trust legislation enables surviving spouses who have property passing through a community property trust to receive a 100 percent step-up in basis on that property for federal income tax purposes, thus creating a benefit similar to that of surviving spouses in community property states.

Most states’ public policies would support this type of legislation.

Married couples moving from a community property jurisdiction to a state without community property legislation would be the most obvious beneficiaries if a state passed this type of legislation. Community property trusts would also be advantageous for married couples whose assets are not currently deemed to be community property but have one or more of the following characteristics: (1) a longterm stable marriage (so that the trust will truly get the step-up at death); (2) highly appreciated property, stocks, or real estate (owned by one or both spouses); (3) an over-weighted financial portfolio that they have delayed selling because of exposure to capital gains tax; (4) rental real estate or other real property that the surviving spouse would not want to manage and instead would sell; (5) property that could benefit from the 100 percent step-up in basis, such as self-created intellectual property, negative-basis but highly depreciated property, gold, artwork, or other collectibles; or (6) no present or foreseeable creditor concerns.

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Even if a married couple does meet some of the criteria, it is important to keep in mind that not all of the couple’s property has to be transferred to the community property trust.

2. More Clarity Regarding Full StepUp in Basis. The community property trust platform would provide more clarity and certainty than relying on many states’ versions of the UDCPRDA and the limited case law available.

3. Evening the Planning Opportunities Available with Those in Community Property States. With respect to the benefits of federal income tax laws’ step-up in basis, allowing the creation of community property trusts in many states would equalize the benefits of married couples in those states to those in community property states, regardless of the property regimes the states have adopted.

4. Streamlining the Estate Planning Process. Allowing married couples to transfer assets to a community property trust would simplify the estate planning process. There would be no need to equalize a couple’s assets between spouses (as often practitioners suggest).

It would give practitioners a simpler method to divide assets between spouses if necessary to fund a trust for estate planning purposes, while also obtaining the tax benefits afforded community property. Income tax basis planning would also be much easier to accomplish.

5. No Need for Tracing. If a married couple used a community property trust, there would be a clear bifurcation between community and separate property. Currently, establishing community property rights for residents of non– community property states requires tracing in order to identify community property and to quantify the amount of community property versus separate property. This labor-intensive exercise often resembles a forensic accounting project. In making the required community versus separate property determination, the practitioner needs to ascertain how the property is treated under the law of the couple’s prior community property jurisdiction as part of the tracing process. Allowing a

Currently, establishing community property rights for residents of non–community property states requires tracing in order to identify community property and to quantify the amount of community property versus separate property.

couple’s community property to be segregated in a community property trust would alleviate the need for the tracing process.

6. Evidence of Couple’s Intent. If a married couple transfers assets to a community property trust, the transfer evidences the married couple’s intention for those assets to be treated as the couple’s community property and to acquire the rights (and to relinquish others) associated with this type of property classification. This evidence of the couple’s intent would arguably diminish post-death litigation regarding whether property is community or separate.

Statutory Language for Community Property Trust Legislation Minimum Requirements. A proposed statute would, at a minimum, provide that (1) a community property trust requires one or both spouses to transfer property to the trust; (2) the trust expressly declares that some or all of the property

transferred is community property under the state’s law; (3) at least one trustee has a nexus with the state, fitting the definition of a “qualified trustee”; (4) the trust agreement sets forth the powers of the qualified trustee, which, at a minimum, include the duty to segregate trust property, maintain records, and prepare any income tax returns that must be filed by the trust; (5) the trust must be signed by both spouses; and (6) the trust contains at its beginning a declaration in capital letters similar to the following declaration required by Alaska: THE CONSEQUENCES OF THIS TRUST MAY BE VERY EXTENSIVE, INCLUDING, BUT NOT LIMITED TO, YOUR RIGHTS WITH RESPECT TO CREDITORS AND OTHER THIRD PARTIES, AND YOUR RIGHTS WITH YOUR SPOUSE BOTH DURING THE COURSE OF YOUR MARRIAGE AND AT THE TIME OF A DIVORCE. ACCORDINGLY, THIS AGREEMENT SHOULD ONLY BE SIGNED AFTER CAREFUL CONSIDERATION. IF YOU HAVE ANY QUESTIONS ABOUT THIS AGREEMENT, YOU SHOULD SEEK COMPETENT ADVICE. Alaska Stat. § 34.77.10(b). See Fla. Stat. § 736.1503.

Optional Features of a Community Property Trust. Each state’s community property trust statute has optional provisions that may (or may not) be included in the community property trust agreement, including each spouse’s rights and obligations in the property transferred to the trust, regardless of when and where the property was acquired or located; management and control of the property transferred to the trust; disposition of the property transferred to the trust on dissolution, death, or the occurrence or nonoccurrence of another event; choice of law governing the interpretation of the trust; any other matter affecting the property transferred to the trust, so long as it does not violate public policy or a statute imposing a criminal penalty;

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and provisions regarding the right to amend or revoke.

Following are some clauses in each state’s legislation: Alaska. Like the other states’ statutes, an Alaska community property trust may not be amended or revoked unless the agreement itself provides for it, or unless amended or revoked by a subsequent community property trust. Alaska Stat. § 34.77.10(e). Further, unless a community property trust expressly provides otherwise, at any time after the death of the first spouse to die, the surviving spouse may amend the community property trust with respect to the surviving spouse’s property (the surviving spouse’s one-half of the community property and any separate property of the surviving spouse) to be disposed of at his or her death. Id. Florida. Because of Florida’s homestead law, Fla. Stat. § 736.1510 provides that Florida homestead property transferred to a Florida community property

trust shall continue to qualify as homestead under Florida law.

Kentucky. Despite passing its state statute in 2020, Kentucky’s legislation notably does not have an unenforceable trust clause, which is a clause providing that a trust executed during marriage is not enforceable if the spouse against whom enforcement is sought proves that the trust was unconscionable, the trust was executed involuntarily by one of the spouses, or financial disclosure was not adequate. See Alaska Stat. § 34.77.10(f ); Fla. Stat. § 736.1512; S.D. Codified Laws § 55-17-14.

South Dakota. South Dakota’s statute specifically provides that a Special Spousal Trust (South Dakota’s terminology for a community property trust) is considered a trust established under the community property laws of South Dakota, and property transferred to the trust as special spousal property means that it is community property for the purposes of I.R.C. § 1014(b)(6). S.D.

Codified Laws § 55-17-5. Until Florida passed its legislation, South Dakota was the only community property trust legislation state that referred to the Code.

See Fla. Stat. § 736.1511. Special rules exist regarding transfers of nonprobate assets to Special Spousal Trusts. S.D. Codified Laws § 55-17-7.

Tennessee. Tennessee’s community property trust legislation was second in time. (Alaska was first.) See J. Paul Singleton, Yes, Virginia, Tax Loopholes Still Exist: An Examination of the Tennessee Community Property Trust Act of 2010, 42 U. Mem. L. Rev. 369, 378 (2011).

Otherwise, Tennessee’s statute resembles other states’ community property trust legislation.

Conclusion States are constantly trying to get an edge over one another in terms of business. To stay current, states will need to consider whether enacting community property trust legislation is viable. n

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An Overview of the Delaware Statutory Trust

By Claire M. Love and Pranav Gangele

T

Getty Images

he Delaware statutory trust (the statutory trust or DST) is a unique tool with several advantageous uses for the real estate practitioner. The 1988 adoption of the Delaware Statutory Trust Act (DSTA), codified in Chapter 38 of Title 12 of the Delaware Code (called the Delaware Business Trust Act when originally adopted), transformed the use of the DST in business transactions by providing separate legal entity status to DSTs. Before the enactment of the DSTA, a trust was a mere fiduciary relationship governed by anachronistic common law rules that were ill-fitted for application to a business trust. The adoption of the DSTA modernized the law with respect to trusts and provided certainty to parties as to the use of trusts in commercial transactions by establishing default rules with respect to fundamental

Claire M. Love is a director of Richards, Layton & Finger, P.A. in Wilmington, Delaware. Pranav Gangele is an associate at Pillsbury in Washington, DC. An earlier version of this article was distributed in connection with the American College of Real Estate Lawyers 2020 Annual Meeting.

issues. Moreover, the DSTA emphasizes the principle of freedom of contract, providing parties with an abundance of flexibility to structure DSTs to meet their needs and giving them the ability to effectuate business arrangements and other transactions with confidence that their intended agreement will be respected. This flexibility includes allowing choices in management structure, duration of the trust, allocation of duties and responsibilities, modification of fiduciary obligations, and limitation of liabilities of trustees and beneficial owners.

As a result of this flexibility, the use of the DST has become increasingly popular in a wide variety of commercial transactions. It is the entity of choice for holding real estate, mortgage loans, vehicles, student loans, and other asset portfolios; for issuance of mortgagebacked and asset-backed securities; and for structured finance transactions, project finance transactions, and liquidating trusts. In addition, the IRS’s recognition that beneficial interests in DSTs qualify for Section 1031 tax-deferred exchange, see Rev. Rul. 2004-86, 2004-2 C.B. (2004), has solidified the status of DSTs as the preferred

investment vehicle for real estate investors.

This article provides a general overview of the DST, including the governing law, the process of forming a DST, and a discussion of several key features of the DST. Governing Law: The DSTA— Flexibility and Freedom of Contract The DST can trace its roots to common law trusts, specifically Massachusetts business trusts. In the early 20th century, corporations could not own real estate, so parties would use a “Massachusetts trust” or “business trust” to hold their real estate portfolios. See generally Wendell Fenton & Eric A. Mazie, Delaware Statutory Trusts, in The Delaware Law of Corporations and Business Organizations (R. Franklin Balotti & Jesse A Finklestein eds., 3d ed. 2020).

Trusts were fiduciary relationships, and management of the assets of the trusts was in the hands of the trustees. The legal landscape for business trusts was primarily common law, which provided limited guidance and lacked certainty for investors, trustees, and creditors in terms of their legal rights and liabilities.

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The unique nature of the DST and the flexibility offered by the DSTA have made the DST a popular vehicle for commercial transactions.

In response to the needs of the business and legal communities, the State of Delaware, already at the forefront of corporate and alternative entity law, adopted the DSTA in 1988—creating the statutory trust. The DSTA incorporated several attractive features of Delaware’s other alternative business entities within a trust structure—including separate legal entity status of the trust and limited liability for beneficial owners and trustees. In creating the Delaware statutory trust the legislature intended to provide practitioners with an easily adaptable trust form to meet the needs of sophisticated business parties.

A primary component of the DSTA is the flexibility it provides to contracting parties. The DSTA explicitly states that it is the intent of the DSTA to “give maximum effect to the principle of freedom of contract and to the enforceability of governing instruments.” Del. Code Ann. tit. 12, § 3825. To achieve this flexibility, the DSTA sets statutory default rules but largely defers to agreements of the parties and the terms set forth in the DST’s governing instrument. This allows parties to alter the default rules and contractually define many important aspects of the trust, including, but not limited to, the rights, duties, and liabilities of trustees and beneficial owners, management of the business and affairs of the trust, duration of the trust, and access to records. Many provisions of the DSTA state, “except to the extent otherwise provided in the governing instrument” before establishing a default rule to allow modification of the rules by contract. See, e.g., id.

§§ 3803 (liability of beneficial owners and trustees), 3806(a) (management of business and affairs of the trust by trustees), 3809 (applicability of trust law), and 3808 (regarding existence of the trust). The DSTA is amended frequently to keep current with modern business needs and to address issues that may be unclear under existing trust law. If neither the DSTA nor the governing instrument addresses an issue, the DSTA also provides that other Delaware laws pertaining to trusts (i.e., both common law and other statutory laws) apply to DSTs unless otherwise provided in the governing instrument.

See id. § 3809. Chapters 33 and 35 of Title 12 of the Delaware Code, in particular, pertain to administration of trusts and duties and liabilities of fiduciaries of Delaware trusts, and therefore can be applied to a DST unless otherwise provided in the governing instrument or covered in the DSTA. Parties should consult counsel familiar with Delaware law when drafting the governing instrument to take advantage of the flexibility of the DSTA and avoid any potential problems by overriding any unwanted default rules. Certain default rules might have an undesired effect if not otherwise altered in the trust agreement. For example, unless otherwise provided in the governing instrument, a DST has perpetual existence.

See id. § 3808(a). Failure to include termination provisions in the trust agreement could make the unwinding and termination of a DST unnecessarily complicated, if not impossible.

The unique nature of the DST and

the flexibility offered by the DSTA have made the DST a popular vehicle for commercial transactions. The benefit of the DSTA’s flexibility and emphasis on the freedom for parties to contract is highlighted in 1031 exchange transactions. In order for parties to comply with Revenue Ruling 2004-86 and structure deals to avoid the “seven deadly sins,” see generally Barry A. Hines & Colin C. Stouffer, Lender Perspectives on Delaware Statutory Trusts (Am. Coll. of Real Estate Lawyers working paper, Annual Meeting 2020), it is critical that parties draft appropriate restrictive provisions into the governing instrument of the trust. Any number of restrictions can be built into the governing instrument, including prohibitions on renegotiation of debt or leases, modification of the property, reinvestment of proceeds from the disposition of property, or recapitalization. The drafters can also specifically provide mechanisms for distribution of cash among the beneficial owners, establishment of reserve accounts to be funded by cash proceeds, or even the conversion of the DST into another legal entity (such as a limited liability company) upon the occurrence of certain events.

Most importantly, with proper drafting, parties can achieve the desired 1031 exchange treatment and comply with IRS guidance because of the DSTA’s express intent to give maximum effect to terms within the governing instrument.

Formation of a DST The DSTA broadly defines a statutory trust as “an unincorporated association which (1) is created by a governing instrument under which property is or will be held, managed, administered, controlled, invested, reinvested and/or operated, or business or professional activities for profit are carried on or will be carried on, by a trustee or trustees or as otherwise provided in the governing instrument for the benefit of such person or persons as are or may become beneficial owners or as otherwise provided in the governing instrument … and (2) files a certificate of trust pursuant to Section 3810 [of the DSTA].”

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Del. Code Ann. tit. 12, § 3801(g).

To create a DST, the following four components are needed: (1) at least one trustee, (2) a certificate of trust filed with the Secretary of State of the State of Delaware (the Secretary of State), (3) a governing instrument, and (4) at least one beneficial owner (which may be identified after formation).

Delaware Trustee Requirement A DST is required to have at least one trustee who, in the case of a natural person, is a resident of the State of Delaware or, if not a natural person, has its principal place of business in Delaware, although the DSTA makes certain limited exceptions to the Delaware trustee requirement for a trust that is or will be registered as an investment company under the Investment Company Act of 1940. See generally id. § 3807. This trustee is often referred to as the “Delaware Trustee.” The Delaware Trustee supplants the need to have an agent for the service of process in Delaware. Service of process on the Delaware Trustee in accordance with the DSTA is effective as service of process on the DST itself and any other trustee of the trust.

Other than the Delaware Trustee, the DSTA does not require a DST to have any other trustees, although a DST may have as many additional trustees as desired.

Organizational Documents: Certificate of Trust and Governing Instrument The organizational documents of a DST consist of a certificate of trust and the governing instrument. The certificate of trust is filed in the office of the Secretary of State and becomes a public record. It must include (1) the name of the trust, (2) the name and address of the Delaware Trustee, and (3) any future effective date of the certificate of trust.

See generally id. § 3810. It should be noted that there are some minor variations in the rules and requirements under the DSTA for DSTs that are registered under the Investment Company Act of 1940. These trusts (and related variations) are beyond the scope of, and not addressed in, this article. Certain additional provisions also need to be included in the certificate of trust if the trust elects to opt out of separate legal entity status or take advantage of the statutory limitation on inter-series liability for a trust that will be organized in series. The DSTA permits the establishment of separate series of trustees, beneficial owners, assets, or beneficial interests having separate rights with respect to specified property or obligations of the DST and allows assets, debts, and liabilities of one series to be insulated from the assets, debts, and liabilities of another series and the trust generally, provided that certain

formalities are followed and other conditions are met. See generally id. §§ 3804, 3806(b). The certificate of trust must be signed by all trustees of the trust at the time of formation.

In addition to filing the certificate of trust, the trust must also have a governing instrument (commonly referred to as the “trust agreement”) at the time of formation. The governing instrument is the document or documents governing the affairs of the DST and the conduct of its business. It typically appoints the trustees and any administrators, officers, or managers of the trust, and includes provisions relating to the purpose and powers of the trust, as well as the identification of beneficial owners, operation, management, dissolution, and termination of the trust. Absent a provision in the governing instrument to the contrary, a DST has perpetual existence and cannot be revoked or terminated by the beneficial owners. When drafting the governing instrument, parties should choose what events or triggers will cause a dissolution and termination of the statutory trust. The DSTA does not dictate the form or content of the governing instrument but does require that the governing instrument be in writing. Given the deference to freedom of contract in the DSTA, careful drafting of the governing instrument is critical to

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The DSTA has been amended to allow parties establishing a DST to opt out of separate legal entity status of the trust if such treatment is not desired.

the successful use of the DST. Although the governing instrument is not filed with the Secretary of State, it is entered into at the time of the filing of the certificate of trust, and the trust will not be considered duly formed without a governing instrument. In practice, parties sometimes use a “short form” or “initial trust agreement” that includes only basic provisions in order to get the trust formed in advance of closing. This allows transaction parties to open accounts, apply for licenses, complete “Know Your Customer” regulatory requirements, and perform other preliminary administrative tasks while the terms of the full-blown trust agreement are negotiated. The short form trust agreement is then amended and restated at closing after the parties have had the opportunity to negotiate and incorporate all desired provisions.

Beneficial Owner Finally, a DST must have at least one beneficial owner. A beneficial owner is an owner of a beneficial interest in a statutory trust. Just as in a common law trust, in which the trustee holds legal title to the trust assets for the benefit of a beneficiary, the DST (or its trustee) holds legal title to the trust assets for the benefit of its beneficial owners.

Under the DSTA, unless the governing instrument provides otherwise, a beneficial owner has no right to specific trust assets, but instead has an undivided beneficial interest in the trust assets and the right to share in the profit and

losses of the trust in proportion to the beneficial owner’s percentage of interest in the trust. Id. § 3805(a). Notwithstanding the nature of the trust assets, the DSTA makes clear that a beneficial interest in a DST is personal property.

The DSTA leaves it to the governing instrument to determine how beneficial ownership is evidenced. Beneficial ownership interests may be certificated or uncertificated. The DSTA does not place any restrictions as to the number of beneficial owners a statutory trust may have. Therefore, subject to other applicable laws and regulations, the pool of investors in a real estate portfolio held by a statutory trust can be very large. In addition, beneficial ownership interests of a DST are freely assignable. However, the DSTA allows parties to limit or place conditions on the assignability of the interests in the governing instrument.

There is a great deal of freedom under the DSTA to structure the rights and obligations of beneficial owners in the governing instrument. The DSTA allows flexibility as to the contribution of a beneficial owner, which may be in cash, property, services rendered, or a promissory note. The DSTA even allows a party to become a beneficial owner without making any contribution or being obligated to make a contribution to the trust. Parties can grant or withhold voting rights for beneficial owners, and the DSTA allows for the governing instrument to set forth provisions relating to voting rights based on classes, groups, or series of beneficial owners,

and the manner in which votes can be cast, meetings can be held, and record dates can be established. It is common for the governing instrument to provide for majority or supermajority requirements to direct a trust to take certain actions, and if the trust is widely held, may provide for the appointment of a beneficial owner representative to take actions on behalf of the beneficial owners.

Key Features of the DST There are several key features of the DST that make it a popular vehicle for structured finance and commercial real estate transactions.

Separate Legal Entity Under the DSTA, by default rule, a DST is a separate legal entity. Id. § 3801(g).

However, the DSTA has been amended to allow parties establishing a DST to opt out of separate legal entity status of the trust if such treatment is not desired. To do so, parties must specify in the governing instrument and certificate of trust that the DSTA will not be a separate legal entity. This is a departure from the common law trust, which is a mere fiduciary relationship requiring actions to be taken by and trust assets to be titled in the name of a trustee. A DST may hold property, enter into contracts, and sue or be sued in its own name. Title to the trust property may be vested in the name of the DST or a trustee of the DST. A DST can hold property in either

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an active or a custodial capacity, and its property is subject to attachment and execution as if it were a corporation. Id. § 3804(a). This is particularly advantageous in real estate transactions, as it enables the trust to take title to the real estate through a purchase agreement or assignment and enter into financing with lenders directly. Therefore, lenders do not need to consider and approve each investor before providing financing. In addition, the trust may sell or swap parcels of real estate in accordance with the governing instrument. The governing instrument will often contain provisions allowing the administrator of the trust to enter into the asset disposition transactions or empowering beneficial owners to direct trustees to enter into the asset disposition transactions.

Special Purpose Entities A DST can be organized for any lawful business or activity, but it is not required to carry on any business activity and need not be organized for profit.

Id. Many DSTs are set up as special purpose entities, or SPEs, in structured finance and commercial real estate transactions in order to segregate assets and minimize insolvency risk. Often, a parent company’s risk of insolvency or negative credit is higher than lenders or investors are willing to accept, or the parent company may wish to segregate certain assets for various other business purposes. An SPE is a separate legal entity formed for a specific, limited purpose, such as holding and managing a single property or a certain portfolio of assets.

Provisions in the governing instrument of a DST that is an SPE prohibit the DST from engaging in any activity other than certain specified activities necessary or desirable in furtherance of its limited purpose. Other restrictive covenants help establish the independence of the SPE from the parent company and its affiliates by limiting the control of the parent or its affiliates over the management and operation of the SPE—thus insulating the SPE from the risk associated with a parent company’s or affiliate’s insolvency. Under the

DSTA, a beneficial owner has no right to specific assets of the trust; in addition, no creditor of the beneficial owner has any right to obtain possession of or exercise remedies with respect to trust assets. Thus, once transferred to the DST, the assets should no longer be available to the parent company or its creditors, even if the depositor retains a beneficial interest in the trust. The lender can then make a loan to the DST or the DST can issue securities to investors secured by those assets without the burden of the parent’s credit risk.

In commercial real estate transactions, lenders often require certain restrictive covenants to be included in the governing instrument in order to achieve bankruptcy-remote status.

Without these essential limitations on activities, purposes, and control, the possibility exists that the entity might be disregarded as a separate legal entity and the assets consolidated in an insolvency proceeding with its parent or affiliate. Under the DSTA, the bankruptcy, dissolution, or termination of a beneficial owner will not result in termination or dissolution of a DST unless otherwise set forth in the trust agreement. This makes the DST an attractive choice for parties who wish to segregate assets in a bankruptcy-remote structure.

Management Structure The DSTA allows for maximum flexibility in the management of the business and affairs of the trust. As a default rule, the trustees of the trust manage the trust’s business and affairs. However, the DSTA grants broad authority to the parties to alter the default rule and institute an alternative management structure. Duties and powers of the trustees may be limited or expanded, delegated or assigned to other persons as agents or independent contractors of the trust, or otherwise modified as the parties see fit. Pursuant to Section 3806(b)(7) of the DSTA, a governing instrument may provide for the appointment, election, or engagement (either as agents or independent contractors of the statutory trust or as delegates of the trustees) of officers,

employees, managers, or other persons who may manage the business and affairs of the statutory trust and who may have such titles and such relative rights, powers, and duties as the governing instrument shall provide. In addition, the DSTA allows the governing instrument to grant rights to any person, including persons not party to the governing instrument. In many commercial transactions, the governing instrument provides for management of the business and affairs of the trust by an administrator on behalf of the trust—usually an affiliate of the depositor or parent company. Physical custody of the trust assets is held by a separate custodian (rather than the trustee), and servicing of the mortgage loans or other assets is performed by skilled third-party servicers or asset managers engaged by the trust.

It is commonplace for governing instruments of DSTs to limit and define the duties of the trustees. For example, the duties of the Delaware Trustee are often limited to only those actions necessary to fulfill the requirements of the Delaware Trustee under the DSTA (accepting service of process in Delaware and executing documents required to be filed with the Secretary of State), and all other duties and powers are vested with other parties, such as another trustee or an administrator or manager. The DSTA also permits the trustees to be directed by a beneficial owner or third party in the management of the trust’s business and affairs.

As a default rule, unless the governing instrument provides otherwise, the right or power of a party to direct the trustee does not cause such directing party to become a trustee or to have any duties (including fiduciary duties) or liabilities to the trust. See generally id. § 3806(a).

Occasionally, for purposes of achieving bankruptcy-remote status and other legal or business purposes, an independent trustee will be used. Unlike directed trustees, these trustees are required to be independent from the parent company or its affiliates and will make certain limited decisions for the trust in accordance with the terms

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November/December 2021 47

of the governing instrument. Lenders and investors using a trust structure typically require certain control rights over some or all important management decisions of the trust. This might include making major decisions with respect to cash flows or trust assets, consenting to amendments, and determining the events that terminate the trust. The trustees or administrators will perform certain agreed-upon actions, such as execution of certain deal documents on the closing date, and otherwise will only take action as specifically directed by a directing party.

This allows the directing party to control certain aspects of the trust. It is often the case that parties will limit the fiduciary duties and the standard of care of the trustees or such other managing parties, all of which the DSTA allows.

Modification or Elimination of Fiduciary Duties One of the key benefits of the DSTA is the ability to modify or even eliminate fiduciary duties under the governing instrument. Importantly, drafters of the governing instrument should note that the DSTA does not set a default standard of care for trustees; thus, unless otherwise provided in the governing instrument, the default will be the standard applied to trustees under general Delaware trust law—a prudent person standard. See id. § 3302(a) (providing that a fiduciary must “act with care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use to attain the purposes of the account”). In addition, the trustees will have fiduciary duties applicable to trustees at common law. However, Section 3806(c) of the DSTA provides that the duties (including fiduciary duties) of trustees, beneficial owners, or other persons may be expanded, restricted, or even eliminated in the governing instrument, provided that the governing instrument may not eliminate the implied contractual covenant of good faith and fair dealing. The DSTA was amended to expand and clarify the delegation provisions, and in doing so, a

default standard of care was added for delegates and other agents or independent contractors managing the affairs of the trust. Unless otherwise provided in the governing instrument or by the terms of the appointment, engagement, election, or delegation, such persons are required to adhere to the same standard of care as the trustee of the trust.

Id. § 3806(n). In practice, parties almost always choose to modify or even eliminate fiduciary duties of the trustee and replace them with specific, negotiated duties and standards of care.

Limited Liability Another important benefit of a DST is the ability to contractually limit the liabilities of the parties. Section 3806(e) of the DSTA states that liabilities of trustees, beneficial owners, or other persons may be expanded, restricted, or even eliminated in the governing instrument, provided that the governing instrument may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing. In most transactions involving DSTs, the parties agree that the trustee will be liable only for acts or omissions in violation of its standard of care (typically, gross negligence and willful misconduct).

In addition, there are several advantageous default rules under the DSTA that provide protection to trustees (and other managers of the trust) and beneficial owners. First, unless the trust agreement provides otherwise, a beneficial owner of a DST is entitled to the same limitation on personal liability as that of a stockholder of a Delaware corporation; therefore, a beneficial owner will not be personally liable for the obligations and liabilities of the DST. Second, the trustees or other managers of a DST, in acting in such capacities, will be liable only to the statutory trust or the beneficial owners for any act, omission, or obligation of the statutory trust or any trustee and not to any other person. Third, the trustees and other persons acting with respect to the trust are protected against liability if they act in good faith reliance on the

provisions of the governing instrument.

Id. § 3806(d).

Delaware Advantage There are several advantages to forming a statutory trust in Delaware.

Unlike some other entity forms, a DST is not required to make periodic filings with the Secretary of State in order to maintain its good standing and valid existence. Other than the initial filing of the certificate of trust, no additional filings are necessary until termination, when a certificate of cancellation is filed (unless an amendment to the certificate of trust is needed). A certificate of trust may be amended, restated, corrected, or canceled by following simple processes outlined in the DSTA. There are currently no Delaware franchise taxes or annual fees with respect to DSTs. For tax purposes under Delaware law, a DST is classified as a corporation, an association, a partnership, a trust, or otherwise, as is determined for federal income tax purposes. Thus, pass-through taxation may be achieved.

The business-friendly environment and sophisticated judiciary in Delaware are major advantages that should not be overlooked by parties contemplating using Delaware statutory trusts. The renowned Delaware Court of Chancery, well known for its expertise and efficiency, has jurisdiction over DSTs. In addition to Delaware’s court system, the Secretary of State is incredibly efficient and user-friendly. Finally, Delaware has numerous experienced corporate trustees and independent managers with vast experience in the use of statutory trusts in all manner of transactions.

Conclusion The advent of the DSTA revolutionized the use of trusts in business transactions. With its innovative combination of default rules, together with flexible deference to the business needs of the parties and emphasis on the enforceability of the governing instrument, the DSTA gives certainty to parties in the use of statutory trusts, making the DST an attractive vehicle for use in structured finance and real estate transactions. n

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On Demand Programming Streaming Now Take advantage of all your excusive RPTE Member Benefits. You can listen to past CLE programming on-demand from the Section of Real Property, Trust and Estate at your leisure, legal education on the go.

Check out the latest programming on-demand.

ambar.org/ondemand

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November/December 2021 49

CAREER DEVELOPMENT AND WELLNESS You’ve Got a Friend in Me RPTE A few months before the pandemic, I went on a date of sorts. A new family moved into my cul-de-sac. Being a recent transplant myself, I was eager to meet “the mom” of the family (for the sake of privacy, we’ll call her “Marcy”) and make a friend in my new hometown.

I got her phone number from another neighbor and invited Marcy to lunch. I prepared for the lunch as if it were a first encounter from an online dating site. I agonizingly chose my clothes (not too lawyerly, not too mom-ish, and, definitely, not too revealing), arrived at the casual (but not too casual!) local restaurant 10 minutes early, smartly chose the healthy (but not too healthy!) entree, paid for my own meal that would not get cold while I awaited Marcy’s arrival, and sat facing the door so that I could warmly welcome her. She arrived and we had a lovely meal, during which we discovered at least a few common interests. After lunch, I sent her a text message, thanking her for meeting me and offering to connect another time. I never heard from Marcy again. Yes, she still lives three doors down.

What on earth does this story have to do with being a lawyer or RPTE? The answer, I think, is: absolutely nothing and absolutely everything.

Intentionally or unintentionally, Marcy delivered a blow to my ego. I licked my wounds for months after this happened. However, the experience, coupled with the pandemic’s profound alteration of how I interact with friends, delivered an opportunity to reflect on what friendship means, its impact on my own wellness and development, and how RPTE has played a critical role in that regard.

While RPTE has undoubtedly delivered countless bangfor-your-buck learning opportunities over the past two decades, what has kept me coming back is the people. Several years ago, former Section Chair Beth Lee led an exercise at an RPTE meeting concerning the nine friends that Contributing Author: Crystal Patterson, Gulfstream Commercial Services, LLC, 222 E. Witherspoon Street, Suite 105, Louisville, KY 40202, cpatterson@gulfstreamdev.com.

everyone should have. I was surprised at the number of RPTE friends listed on my exercise grid.

As attorneys, we are trained to be professional advocates. We should be just nice enough that clients like us and seek to hire us, yet also just detached and professional enough that our adversaries and counter-negotiators respect and, possibly, fear us.

These are not exactly compatible approaches to making friends, and, perhaps, they are wholly incompatible. Yet, lawyers—like all humans—crave the benefits that come from genuine, lasting friendships.

Friendships are important, and research bears that out. People with social support are more likely to maintain an exercise plan longer than a year after starting it. The least socially integrated people experience memory declines twice as fast as those who are more connected. Social support wards off depression and suicide. People who identify as “lonely” tend to have higher blood pressure and other risk factors for heart disease, and they are more likely to “give up” or “quit trying” when dealing with stressors, such as illness. People with strong social connections, and men especially, see a marked increase in their life span.

RPTE provides a unique platform for making such connections. The Section meetings offer settings within which to gather with other like-minded (or similarly challenged, depending on your perspective) individuals, who understand the fine line upon which we are expected to walk. Because RPTE attorneys hail from across the country, the fear of consorting with a competitor is greatly diminished. RPTE’s meetings occur just frequently enough to support connection, yet infrequently enough to keep things fresh and exciting.

Yes, this is a formula for friendship and wellness success. I know this because while I proudly wear my “I’m not for everyone” t-shirt, I am simultaneously relieved to know that I have a tribe in RPTE. Through them, I have sought and received advice on substantive legal issues, divorce and dating in your 40s, inspiring employee engagement, unique travel experiences, technology know-how, trouble-shooting teenagers, transitioning

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CAREER DEVELOPMENT AND WELLNESS

from private practice to an in-house job, how to make the perfect martini, requesting a pay raise, and moving to a new city. My RPTE friends have seen me at my best and at my worst, and I know my experience is not unique.

Lawyers have not always done a superb job of raising one another up or showing vulnerability. Yet the next generations of attorneys deserve, and may even demand, a fresh approach to the rigors of being a professional, the balance of work and not-work, and a safety net to acknowledge when help is needed, whatever the issue may be. Indeed, part of being successful is taking care of yourself. Accordingly, this year, RPTE is launching a new special committee on attorney development and wellness. At first blush, these may appear to be the “soft subjects” that no one wants to admit are important or that they personally need help with, but I believe the topics to be addressed by the committee are the lifeblood of the profession’s future. The committee

RPTE Special Committee on Career Development & Wellness will focus on many of the same subjects that my RPTE friends and I have discussed over the years. No, the committee won’t be offering parenting or mixology courses.

We are poised, however, to deliver a toolbox of timeflexible and dynamic resources on topics such as career transitions, partnering with your assistant, work-life balance, executive presence, integrating physical activity into the workday, and public speaking skills to support the whole attorney throughout the entire career continuum. Content will be offered through a series of podcasts, mindfulness exercises, lectures, round-table discussions, online forums, and, perhaps, even a good old-fashioned happy hour where the value of a handshake and a shared laugh can always be counted on to cultivate a new friendship. Together, we will learn to apply our own proverbial oxygen mask before assisting others.

As for Marcy and me, I did what any self-respecting lawyer would do. After waiting over a year, I sent her a message a few weeks ago and offered to help her with a neighborhood endeavor I learned she was undertaking.

Did she respond? You’ll have tune into one of our Committee events to find out. n

As part of RPTE’s ongoing effort to deliver value to its members, the Section has launched the Special Committee on Career Development & Wellness. The mission of the committee is to provide an array of resources that support attorneys throughout the continuum of their careers. The committee encourages Section members to contact any committee member with suggestions for programming.

CO-CHAIRS Jim Durham (RP) Crystal Patterson (TE) COMMITTEE MEMBERS Abigail Earthman (TE) Dana Fitzsimons (TE) Lilly Gerontis (RP) Soo Yeon Lee (RP) Nancy Little (RP) Marie Moore (RP) Kelly Perez (TE) Mary Vandenack (TE)

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November/December 2021 51

THANK YOU TO ALL OUR SPONSORS FOR THEIR GENEROUS SUPPORT OF OUR 2021 RPTE FALL LEADERSHIP MEETING

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CORPORATE SPONSORS GOLD

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IN-KIND SPONSOR

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November/December 2021 53

ENVIRONMENTAL LAW U P D AT E Evaluation of Activity and Use Limitations in Real Estate Transactions Noted industrial widget manufacturer, Johnson Co., is considering a move from their dilapidated facility to fancy new digs. All is going well with the property acquisition until Johnson Co. begins its obligatory environmental due diligence.

Lo and behold, it turns out that the sparkly new property is hiding a deep, dark secret—residual contamination!

Sitting beneath the beautiful new building and its newly-paved parking lot is a whole bunch of contaminated soil and groundwater. And that’s not all! The property is also subject to the dreaded Activity and Use Limitation (AUL)!

Should Johnson Co. instruct their attorneys to go pencils down and look for a better option? Or does their intended use for the property work within the confines of the AUL? Known by a handful of different monikers across the country, AULs are an indispensable tool for property owners to address contamination in a cost-effective manner that protects human health and the environment without hamstringing the future beneficial use of a property. Typically implemented through a covenant recorded in the chain of title, AULs restrict access to or disturbance of contaminated soil or groundwater through a combination of engineering and institutional controls.

Engineering controls are physical barriers that prevent direct contact with the contaminants in question.

They can be as simple as a concrete cap or a specific depth of clean fill over contaminated soil. Engineering Environmental Law Update Editor: Kyle R. Johnson, Brown Rudnick LLP, 185 Asylum Street, Hartford, CT 06103, kjohnson@ brownrudnick.com.

controls also can prevent the migration of impacted groundwater to or from a property through the use of so-called vertical engineered barriers (VEBs), such as slurry trenches or sheet piling, or the infiltration of vapors into a structure through the use of passive vapor barriers or sub-slab depressurization systems.

Institutional controls, on the other hand, typically restrict the uses of the property or the activities that can take place at the property. Institutional controls can be relatively simple, e.g., restricting the use of the property to non-residential uses or prohibiting groundwater usage; or more complex, e.g., restricting soil disturbance in certain designated areas of the property.

Institutional controls also will set forth obligations related to engineering controls, if any. For instance, the property owner may have to conduct inspections related to maintenance of a cap or other engineering controls or periodically monitor groundwater or air quality to ensure the efficacy of VEBs or sub-slab systems.

So what engineering or institutional controls are in place at the proposed location of the new Johnson Co. world headquarters? You name it! The site is limited to non-residential uses and there is a prohibition on the use of site groundwater. There is also a cap over the entire site, a VEB preventing migration of site groundwater, and a sub-slab depressurization system to prevent vapors from entering the building. Okay—so the contamination is capped, the groundwater is contained, and vapors are being vented to the outside air. That’s it, right? Johnson Co. can purchase the property and not have to worry about a thing, right? Yes and no.

Will Johnson Co. have to address the

residual contamination at the property?

Probably not. Will it have to maintain the cap and sub-slab systems? Absolutely, and it won’t be cheap!

Although AULs are an important tool to address contamination, they are not without costs and other obligations going forward, potentially in perpetuity. Between ongoing groundwater monitoring, cap inspections, and other ongoing obligations, costs associated with AULs can easily breach six figures over the life of a property. Understanding these obligations and the costs associated with them during the acquisition of a property allows buyers to address them upfront and potentially to keep some of the obligations and costs with the seller.

There are several cost areas for Johnson Co., or any party, to keep in mind during the transaction. The first is costs associated with long-term maintenance obligations related to engineering controls. For a cap over contamination, periodic inspections to ensure the integrity of the cap are likely to be required on at least an annual basis, and possibly as often as quarterly or monthly. Although one could rely on onsite personnel to conduct the inspection, it is probably better to rely on an environmental consultant trained in identifying issues with engineered caps. Depending on the frequency of inspections, inspections could easily cost tens of thousands of dollars per year. Inspections of sub-slab depressurization systems or VEBs are also a likely possibility.

Directly related to inspections is the corrective action required as a result of the inspection. If the cap or sub-slab system is no longer protective of human health or otherwise operates at less than peak performance, the responsible

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party will need to take action to repair the cap or to ensure that the engineering control operates as intended. Cap maintenance is likely to be a bigger cost in the coming decades because recordbreaking heatwaves and unprecedented rain and snowfall events are likely to be particularly hard on engineered caps.

Another item to consider is possible financial assurance requirements associated with AULs. Although not a direct cost per se, financial assurance mechanisms are typically required to ensure that adequate funds are in place to meet the AUL obligations. Most states allow a variety of different financial mechanisms, including insurance, guarantees, letters of credit, or surety bonds. Most states will allow so-called self-insurance with proof that the ownership entity’s net worth is over potential remediation costs. With the widespread use of single-purpose entities to purchase properties, demonstrating sufficient net worth can be a challenge for some entities.

So how should Johnson Co. deal with these liabilities and costs? One option is an environmental escrow or holdback

arrangement. This type of arrangement is particularly helpful to a seller that wants to ensure it can walk away from the property without having to allocate future resources to operation- and maintenance-related activities. Rather, the parties agree to hold a certain amount of the sale price in an interestbearing escrow account that the buyer can draw against to deal with costs related to cap maintenance, groundwater monitoring, etc. Importantly, the escrow arrangement should provide the seller an opportunity to approve of the incurred costs so that it can ensure that the necessary work is being done by the new buyer.

From the buyer’s perspective, this may not be ideal as it still has to meet the necessary AUL obligations (and likely financial assurance requirements) even if those costs aren’t coming out of pocket in the near term. Moreover, the buyer continually has to get approval from the former owner to get reimbursed from the escrow account.

This can lead to unnecessary and costly negotiations over every single drawdown. The buyer instead may

prefer a purchase price reduction that essentially “pays” for the future costs associated with the AULs. We typically rely on environmental consultants to provide a ballpark estimate of likely costs associated with the AULs requirements to inform the purchase price reduction.

There is the option to have the seller retain all obligations associated with the AULs. This may be a big ask, especially in situations in which the seller is a single-purpose entity, but certainly not an impossibility. Finally, a combination of the above approaches may be a viable option as well—e.g., an environmental escrow to cover the buyer’s yearly or periodic inspection costs, while the seller retains responsibility for cap maintenance and repairs. The preferred approach will likely be highly specific to the facts at issue, but buyers should go in knowing that an AUL, and its associated obligations, is a manageable hurdle that should not kill a potential deal.

As always, remember to get your environmental attorney involved early and often! n

RPTE Member Benefits

MODIOLEGAL

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November/December 2021 55

PRACTICAL POINTERS FROM PRACTITIONERS Amendments to Delaware’s Purchase Money Mortgage Statute Recent changes to Delaware’s purchase money mortgage statute may promote increased use of this real estate financing option, but practitioners must familiarize themselves with the requirements and limitations of the amended statute to effectively advise their clients.

On September 28, 2020, Gov. John Carney signed an act amending the Delaware purchase money mortgage statute codified in Title 25, Section 2018 of the Delaware Code. Under the prior statute, purchase money mortgages were limited to mortgages made by the purchaser to the seller of the property to secure all or part of the purchase price and had to be recorded within five days of the recording of the deed to receive priority. Because of the narrow scope of the prior statute, the use of purchase money mortgages was limited, even though the act allowed later-recorded purchase money mortgages priority over other earlier recorded liens or mortgages. The new statute expands the definition of a purchase money mortgage under Delaware law to include third-party lenders who provide financing for the purchase, extends the time to record a purchase money mortgage from five days to ten days, and explicitly subordinates mechanics’ liens to purchase money mortgages.

Expanded Definition of Purchase Money Mortgage Under the amended statute, a “purchase money mortgage” means one or more of the following: (1) a mortgage Contributing Author: Olufunke O. Leroy, Holland & Knight LLP, 2929 Arch Street, Suite 800, Philadelphia, PA 19104, Olufunke.Leroy@hklaw.com.

taken by the seller to secure payment of all or part of the purchase price; or (2) a mortgage taken by a mortgagee other than the seller to secure the repayment of money advanced by the mortgagee to or on behalf of a mortgagor at the time the mortgagor acquires title to the property and used by the mortgagor at that time to pay all or part of the purchase price. 25 Del. Code § 2108(a).

The definition of a purchase money mortgage has been expanded to include any mortgage that secures the repayment of money advanced by the mortgagee at the time the mortgagor acquires title to the property. In short, for a mortgage to have purchase money priority, the mortgagee need not be the seller as long as the mortgage is made by the purchaser to the mortgagee to secure all or part of the purchase money.

Further, under the new statute, a mortgage that states that it is intended to constitute a purchase money mortgage creates a rebuttable presumption that the mortgage is a purchase money mortgage. Accordingly, if the parties intend for a mortgage to be a purchase money mortgage, then the mortgage documents should include the statutory language to create the presumption, which would mitigate potential priority disputes by shifting the burden of proof to the party challenging the priority of the purchase money mortgagee.

Achieving Super-Priority Status For a purchase money mortgage to have priority status, both of the following must occur: (a) the purchaser must make a purchase money mortgage to the seller or mortgagee on all or part

of the property being sold to secure all or part of the purchase money; and (b) the purchase money mortgage must be recorded within ten days after the deed conveying the property from the seller to the purchaser is recorded. While the extended time to record strengthens purchase money mortgages in favor of lenders, the statute does not apply retroactively to previously recorded mortgages, as the timing is tied to the recording of the purchaser’s deed.

If the two conditions above are satisfied, then the lien of the purchase money mortgage on all or part of the property will have preference to and priority over a judgment against the mortgagor or any other lien created or suffered by the mortgagor, including mechanics’ liens filed or entitled to be filed under Chapter 27 of the Delaware Real Estate Code (i.e., Title 25).

Such priority applies even when the judgment or lien is dated before the purchase money mortgage.

Notably, the statute applies to subordinate purchase money mortgages. If there are two or more purchase money mortgages on the same property, then the mortgages are given priority based on the times that each is recorded in the proper office. If multiple purchase money mortgages on the same property are recorded at the same time, then none will receive preference or priority over another. 25 Del. Code § 2108(d).

Practical Considerations Legislation amending the purchase money mortgage statute was introduced in the Delaware General Assembly on June 12, 2020. It passed unanimously in the Senate on June 23, unanimously in the House on June

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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25, and was signed by the governor on June 28, 2020, taking effect immediately. The rapidity of the bill’s passage signals an eagerness by the legislature and executive branch to encourage the use of purchase money mortgages.

Indeed, the expanded scope and superpriority of purchase money mortgages can be a useful tool for lenders and may

facilitate increased real estate financing.

Delaware real estate practitioners advising their clients should note that the purchase money mortgage does not apply to loans refinancing existing debt, even if funds from the original debt were used as purchase money for the property. The statute also does not apply when loans are secured by a

property but the loan funds are used for other purposes besides acquisition costs. In drafting purchase money mortgages, practitioners should specifically identify the mortgage as a purchase money mortgage and record any information about lien priority directly in the mortgage. n

RPTE PUBLICATIONS Understanding Life Insurance and Rethinking Policy Management and Evaluation Explaining the Unexplainable Gary L. Flotron, M.B.A., CLU®, ChFC®, AEP®

Comprehensive resource for planning your client’s personal and business insurance needs Are you intimidated by life insurance? From questions about the amount and type of insurance coverage needed and the credit and investment risks involved to choosing a policy and carrier, life insurance can be an intimidating planning vehicle. This clearly written guide examines fiduciary risk management and the criteria and methods used to evaluate a life insurance policy.

2020, 311 pages, 7 x 10, Paperback/eBook Product Code 5431118 $119.95 List Price $89.95 RPTE Members

The author’s discussion and analysis of the fundamentals and the mathematics of life insurance are enriched by a carefully selected collection of articles by nationally known practitioners and advisors from the legal, actuarial, financial, and trust fields who illustrate and offer unique viewpoints on the book’s topics.

All RPTE publications can be purchased on the ABA Web Store, ShopABA.org, or by calling the Service Center, 800-285-2221.

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November/December 2021 57

TECHNOLOGY P R O B AT E Digital Planning on iOS Over the last decade, digital assets have become an increasingly prevalent aspect of estate planning. Evidence of this can be demonstrated by the nearly ubiquitous adoption of “digital asset” clauses in most newly drafted wills. While not everyone owns cryptocurrency (or has even heard of it), most individuals have various forms of email accounts, online profiles, and cloud-based storage that could be lost to the void without appropriate planning. Much of the rise in digital asset planning over the last several years was spurred on by the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which has been adopted with some variations in most US states and territories. Among other things, RUFADAA permits an individual to use an “online tool,” which is an account-specific feature that an online custodian (e.g., Google, Facebook) may offer to its customers that enables them to provide directions for disclosure or nondisclosure of digital assets to a designated person. Any assets that are not addressed with an online tool are subject to the terms of a testator’s estate planning documents. And, if the decedent does not have such documents or they lack the above-mentioned digital asset provisions, the estate’s access to the digital assets and information are generally subject to the custodian’s Terms of Service Agreement (i.e., the mostly unread terms that nearly every platform asks users to agree to before allowing them onto their platform).

These Terms of Service Agreements are Technology—Probate Editor: Ross E. Bruch, Brown Brothers Harriman & Co., One Logan Square, Philadelphia, PA 19103-6996, ross. bruch@bbh.com.

Technology—Probate provides information on current technology and microcomputer software of interest in the trust and estate area. The editors of Probate & Property welcome information and suggestions from readers.

generally unhelpful in the estate administration process.

Online tools are far from perfect.

They are not uniform in their application, they have the potential to disrupt complex estate plans, and there is no easy way to search for the existence of online tools after a decedent’s passing.

However, the biggest problem is that there has been little adoption by major technology providers. For several years, Google’s Inactive Account Manager and Facebook’s Legacy Contact tools (each of which had its own quirks and drawbacks) stood out as the only relevant online tools. That changed earlier this year when Apple announced the launch of its online tool named “Digital Legacy.” In short, Apple’s Digital Legacy tool allows Apple users to name one or more designated recipients or “Legacy Contacts” who will be able to access some of the decedent’s iOS data like photos, videos, notes, and iCloud email accounts after the account owner dies, either by viewing the data through iCloud.com or by downloading a copy. But iCloud Keychain, payment information, subscriptions, and licensed media will not be accessible to the Legacy Contact.

Digital Legacy was previewed at this year’s Worldwide Digital Conference or WWDC (Apple’s annual event to showcase its new software and technology)

as an added feature to the iCloud under the most recent Apple update, iOS 15.

As Mike Abbott, Vice President of Apple Cloud Services, said at the WWDC announcement, “We don’t often think about it, but it’s important that we can easily pass down information to family members or friends when we pass away. So you’ll now be able to add people to your account as Legacy Contacts.

So when you’re gone, they can request access, and your information can be passed along quickly and easily.”

Planning Implications For many tech enthusiasts, this feature was likely far less interesting than other updates announced at WWDC. However, Digital Legacy will probably have significant implications for estate planners and their clients.

First, while some may doubt the future of online tools, it was essential for Apple to get behind the idea if online tools were to succeed. If, instead, Apple chose to ignore the need for an online tool or find a different solution entirely, it would bring to question whether RUFADAA’s hierarchy was correctly established. Apple’s endorsement of online tools confirms that online tools will likely remain relevant for years to come, and it is hoped with further improvement.

Second, other technology providers may have been waiting for Apple’s endorsement before choosing to offer an online tool of their own. Now that they have it, these companies may be willing to invest the time and money building this feature into their systems.

Additionally, more tech companies may begin to offer their version of an online tool if they perceive a general user expectation that this feature should be universally available.

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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November/December 2021

TECHNOLOGY P R O B AT E

Third, given how disruptive online tools can be to an estate plan (like a designated beneficiary form that clients occasionally forget to alert their counsel about), it has become essential that attorneys ask their clients about online tool usage and digital asset ownership as part of their inventory requests and check-ups. Apple’s entry into online tools reinforces this. Although most clients do not expect their attorneys to be IT experts, estate planners should be proficient in the subject matter to ensure they collect the right information from their clients and answer their client’s basic technology questions.

Digital Legacy Setup and Legacy Contact Access Whether you are turning on Digital Legacy for yourself or walking your clients through the process, here’s how to set it up on an iPhone, iPad, etc.: • After downloading and installing iOS 15 (or any later version), open “Settings” and tap on your name at the top of the screen.

• Choose “Password and Security,” tap “Legacy Contact,” and then tap “Add Legacy Contact.”

• Enter your Apple ID password.

• Choose the designated Legacy Contacts, then tap “Continue.”

• This will generate an Access Key—a security code that your Legacy Contacts will be required to upload when they request data from Apple. Apple suggests that the account owner store a copy of the Access Key and simultaneously share it with Legacy Contacts.

Designated Legacy Contacts can request the decedent’s data from Apple at its dedicated digital legacy website (www.digital-legacy.apple.com).

They will only have a limited time to do so, however, before Apple permanently deletes the data (Apple has not yet announced the timeframe as of the date of this writing). Legacy Contacts will need to provide a death certificate and the Access Key that the decedent

created. Apple then needs to approve the request, though it is unclear whether it will be done manually by an Apple employee or by another method.

Following Apple’s approval, Legacy Contacts can download a copy of the decedent’s data, and the Activation Lock will be removed from all of their Apple devices.

Important Features A critical difference between Digital Legacy and Google’s Inactive Account Manager is automation. Google’s online tool requires a user’s account to become inactive for a designated time before its protocol delivers designated individuals access to a decedent’s account.

The advantage of this method is that no additional paperwork or transactions need to occur to trigger the release of data—the decedent’s failure to log on to his Google account is the only relevant factor. Of course, this methodology could lead to false positives during the account owner’s lifetime (e.g., the owner simply does not log into a Google account for a while), as well as false negatives after the account owner dies (e.g., the decedent’s surviving spouse or personal representative continues to log into the decedent’s account after their death, thus never allowing the inactivity clock to lapse).

Apple chose a different approach by requiring the Legacy Contact to provide an Access Key and the decedent’s death certificate to Apple. The added step of

requiring both items is a welcome security feature as it will limit fraudulent access to the user’s account (both during the user’s life and after death). It is currently unclear whether Apple will require a certified copy of a decedent’s death certificate or whether a scan or photograph of the certificate will be sufficient. Apple has not provided much insight into this question. As of the date of this writing, Apple’s Digital Legacy website merely says, “proof of death documents are required to delete a decedent’s Apple ID….” For the time being, the Legacy Contact will presumably need to supply Apple with a physical copy. Still, it will be interesting to watch if Apple can securely “digitize” the process and provide a welcome improvement to the current practice.

Conclusion Apple’s Digital Legacy is a welcome addition to the catalog of online tools.

Hopefully, this will encourage other tech companies to develop their own online tools, giving users better opportunities to transfer essential data to loved ones after their death. Between Apple’s online tool addition and others currently being developed, the digital asset management and planning process will continue to evolve in the coming years. It is essential for estate planners to be aware of these changes, to know the right questions to ask, and to know the best answers to provide to their clients. n

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Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

November/December 2021 59

2021 PROBATE & PROPERTY INDEX AUTHOR INDEX Alaimo, Marve Ann M., Mom Liked Me Better, and She Will Prove It: Pre-Mortem Validation—Permanent Solution of Fad? Mar/Apr at 50.

Arentz, Elizabeth A., Mom Liked Me Better, and She Will Prove It: Pre-Mortem Validation—Permanent Solution of Fad? Mar/Apr at 50.

Bernhardt, George P., The Impacts of the Coronavirus Pandemic on Real Estate Contracts: Force Majeure, Frustration of Purpose, and Impossibility, Jan/Feb at 34.

Bourguignon, Thomas J., Real Property Recording Systems and e-Recording in the Age of COVID-19, May/Jun at 28.

Brauer, Brandon, Autonomous Vehicles and Parking: Preparing for a Bumpy Road Ahead, Mar/Apr at 14.

Brew, Gerard G., Estate Planning for a Disrupted Life—Lessons from S.T. v. 1515 Broad Street, Jul/Aug at 26.

Caswell, Joshua, NFTs for Estate Planners: Not Just a Token Concern, Sep/Oct at 10.

Cohen-Kurzrock, Benjamin A., Sanmina Corporation: A Cautionary Tale About the Footnote that Waived Privilege, May/Jun at 38.

Comiter, Andrew R., Sanmina Corporation: A Cautionary Tale About the Footnote that Waived Privilege, May/Jun at 38.

Correll, Rich R., A Better Approach in the Assessment and Valuation of Free-Standing, Single-User, Retail Properties, Mar/Apr at 36.

Dell, Lauren G., Celebrity Estate Planning: Misfires of the Rich and Famous IV, Sep/Oct at 34.

Dibbini, Paul J., How Lenders Can Avoid Potential Pitfalls in Community Property States, Mar/Apr at 42.

DiSciullo, Alan M., The Effect of COVID-19 on Commercial Lease Transactions, Jan/Feb at 46.

Drennan, William A., Hire the Funeral

Clowns, Blast My Ashes into Orbit, and Deduct It All! Mar/Apr at 26.

Dube, Steven, Autonomous Vehicles and Parking: Preparing for a Bumpy Road Ahead, Mar/ Apr at 14.

Hayward, Daniel F., Mom Liked Me Better, and She Will Prove It: Pre-Mortem Validation—Permanent Solution of Fad? Mar/Apr at 50.

Hill, Cashauna M., Evictions and the COVID19 Pandemic, Jan/Feb at 42.

Duffy, Michael, For Auction Houses and Art Dealers: Sales Tax Should Be a Science…Not an Art, May/Jun at 14.

Hirschfeld, Philip R., Lifesavers for Adverse Tax Reform: Opportunity Zone Investing and Other Options, Nov/Dec at 10.

Durham, James Geoffrey, Lawyers Working Remotely—Navigating ABA Formal Opinion 495, May/Jun at 44.

Kent, Gary R., The Effect of the New 2021 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys on Commercial Real Estate Transactions, Sep/Oct at 22.

Engelhardt, Jo Ann, ABA Resolution 10H: Placating Landlords, Protecting Tenants, Jan/ Feb at 55.

Kogan, Peter L., Subleases and Assignments: Drafting Best Practices, Jul/Aug at 36.

English, David, So Many Have Died: COVID19 in America’s Nursing Homes, Jan/Feb at 12.

Kroetz, Stacia C., Celebrity Estate Planning: Misfires of the Rich and Famous IV, Sep/Oct at 34.

Favata, Richard, How Lenders Can Avoid Potential Pitfalls in Community Property States, Mar/Apr at 42.

Lackey, Kenneth J., The Special Peril Doctrine: An Uncommon Tool That Can Help in Tragic Circumstances, Jul/Aug at 42.

Fersko, Jack, The Impacts of the Coronavirus Pandemic on Real Estate Contracts: Force Majeure, Frustration of Purpose, and Impossibility, Jan/Feb at 34.

Love, Claire M., An Overview of the Delaware Statutory Trust, Nov/Dec at 42.

Furtado, Leigh E., NFTs for Estate Planners: Not Just a Token Concern, Sep/Oct at 10.

Lucero, Orlando, ABA Resolution 10H: Placating Landlords, Protecting Tenants, Jan/Feb at 55.

Gangele, Pranav, An Overview of the Delaware Statutory Trust, Nov/Dec at 42.

Manigault, Edward M., Beneficial Ownership Disclosure and the Corporate Transparency Act: Overdue or Overwrought? Jul/Aug at 48.

Gardner, G. Andrew, Estoppels and SNDAs— Understanding and Negotiating the Landlord’s Lender’s Lease Documents, Sep/Oct at 52.

Marzullo, Jo-Ann, ABA Resolution 10H: Placating Landlords, Protecting Tenants, Jan/Feb at 55.

Gibbons, Wendy, The Effect of the New 2021 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys on Commercial Real Estate Transactions, Sep/Oct at 22.

Marzullo, Jo-Ann, RPTE Advocates for Remote Ink Notarization and Remote Witnessing During the Pandemic, Jan/Feb at 53.

Goldsmith, Jessica Galligan, Celebrity Estate Planning: Misfires of the Rich and Famous IV, Sep/Oct at 34.

Hartzer, Robert G.S., Property Insurance Issues: COVID-19 and the Vacancy Exclusion, May/Jun at 50.

McPhelin, Hannah Dowd, Estoppels and SNDAs—Understanding and Negotiating the Landlord’s Lender’s Lease Documents, Sep/ Oct at 52.

Mehmetaj, Ernira, The Promise and Perils of Shared Equity Financing, Mar/Apr at 46.

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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November/December 2021

2021 PROBATE & PROPERTY INDEX

Nelson, Brent W., Revocable Trusts for Changing Times, Sep/Oct at 40.

Sass, Rachel M., Revocable Trusts for Changing Times, Sep/Oct at 40.

Ounanian, Melineh S., Mom Liked Me Better, and She Will Prove It: Pre-Mortem Validation—Permanent Solution of Fad? Mar/Apr at 50.

Schnepf, Alex J., A COVID-19 Heavyweight Bout: Tenant Safety Versus Discrimination, Jan/Feb at 24.

Palmieri, Andrew, Autonomous Vehicles and Parking: Preparing for a Bumpy Road Ahead, Mar/Apr at 14.

Plum, Deborah, Revocable Trusts for Changing Times, Sep/Oct at 40.

Prieto, Nicole D., Subleases and Assignments: Drafting Best Practices, Jul/Aug at 36.

Reiss, David, The Promise and Perils of Shared Equity Financing, Mar/Apr at 46.

Saponaro, Joseph M., Estoppels and SNDAs— Understanding and Negotiating the Landlord’s Lender’s Lease Documents, Sep/Oct at 52.

Shaffer, Brent C., Retail Tenants and COVIDRelated Business Interruption Insurance Claims: Where Things Stand after the Big Fight, Jul/Aug at 14.

Shepherd, Kevin L., Beneficial Ownership Disclosure and the Corporate Transparency Act: Overdue or Overwrought? Jul/Aug at 48.

Sneeringer, Michael A., An Introduction to Community Property Trusts, Nov/Dec at --.

Sneeringer, Michael A., Mom Liked Me Better, and She Will Prove It: Pre-Mortem Validation—Permanent Solution of Fad? Mar/Apr at 50.

Soojian, Jessica D., Celebrity Estate Planning: Misfires of the Rich and Famous IV, Sep/Oct at 34.

Studin, Daniel J., Celebrity Estate Planning: Misfires of the Rich and Famous IV, Sep/Oct at 34.

Stutzman, David E., Celebrity Estate Planning: Misfires of the Rich and Famous IV, Sep/ Oct at 34.

Sugiyama, John H., Asymmetrical Conservatorship Litigation, Nov/Dec at 22.

Thomas, Samuel F., Celebrity Estate Planning: Misfires of the Rich and Famous IV, Sep/Oct at 34.

Whalen, Jerome D., A Landowner’s Guide to Ground Leases, Sep/Oct at 46.

SUBJECT INDEX Artificial Intelligence Andrew Palmieri, Steven Dube, and Brandon Brauer, Autonomous Vehicles and Parking: Preparing for a Bumpy Road Ahead, Mar/Apr at 14.

Assessments Rich R. Correll, A Better Approach in the Assessment and Valuation of Free-Standing, Single-User, Retail Properties, Mar/Apr at 36.

Community Property Richard Favata and Paul J. Dibbini, How Lenders Can Avoid Potential Pitfalls in Community Property States, Mar/Apr at 42.

Michael A. Sneeringer, An Introduction to Community Property Trusts, Nov/Dec at 34.

Conservatorships John H. Sugiyama, Asymmetrical Conservatorship Litigation, Nov/Dec at 22.

Construction George P. Bernhardt and Jack Fersko, The Impacts of the Coronavirus Pandemic on

Real Estate Contracts: Force Majeure, Frustration of Purpose, and Impossibility, Jan/ Feb at 34.

COVID-19 George P. Bernhardt and Jack Fersko, The Impacts of the Coronavirus Pandemic on Real Estate Contracts: Force Majeure, Frustration of Purpose, and Impossibility, Jan/ Feb at 34.

Thomas J. Bourguignon, Real Property Recording Systems and e-Recording in the Age of COVID-19, May/Jun at 28.

Alan M. DiSciullo, The Effect of COVID19 on Commercial Lease Transactions, Jan/ Feb at 46.

David English, So Many Have Died: COVID-19 in America’s Nursing Homes, Jan/Feb at 12.

Robert G.S. Hartzer, Property Insurance Issues: COVID-19 and the Vacancy Exclusion, May/Jun at 50.

Cashauna M. Hill, Evictions and the COVID-19 Pandemic, Jan/Feb at 42.

Jo-Ann Marzullo, RPTE Advocates for Remote Ink Notarization and Remote Witnessing During the Pandemic, Jan/Feb at 53.

Alex J. Schnepf, A COVID-19 Heavyweight Bout: Tenant Safety Versus Discrimination, Jan/Feb at 24.

Brent C. Shaffer, Retail Tenants and COVID-Related Business Interruption Insurance Claims: Where Things Stand after the Big Fight, Jul/Aug at 14.

Estate Administration Kenneth J. Lackey, The Special Peril Doctrine: An Uncommon Tool That Can Help in Tragic Circumstances, Jul/Aug at 42.

Estate Planning Gerard G. Brew, Estate Planning for a Disrupted Life—Lessons from S.T. v. 1515 Broad Street, Jul/Aug at 26.

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

November/December 2021 61

2021 PROBATE & PROPERTY INDEX

Joshua Caswell and Leigh E. Furtado, NFTs for Estate Planners: Not Just a Token Concern, Sep/Oct at 10.

Real Estate Contracts: Force Majeure, Frustration of Purpose, and Impossibility, Jan/ Feb at 34.

Ernira Mehmetaj and David Reiss, The Promise and Perils of Shared Equity Financing, Mar/Apr at 46.

Benjamin A. Cohen-Kurzrock and Andrew R. Comiter, Sanmina Corporation: A Cautionary Tale About the Footnote that Waived Privilege, May/Jun at 38.

Alan M. DiSciullo, The Effect of COVID19 on Commercial Lease Transactions, Jan/ Feb at 46.

Real Estate Ownership Kevin L. Shepherd and Edward M. Manigault, Beneficial Ownership Disclosure and the Corporate Transparency Act: Overdue or Overwrought? Jul/Aug at 48.

William A. Drennan, Hire the Funeral Clowns, Blast My Ashes into Orbit, and Deduct It All! Mar/Apr at 26.

Jessica Galligan Goldsmith, Samuel F. Thomas, Jessica D. Soojian, Stacia C. Kroetz, David E. Stutzman, Lauren G. Dell, and Daniel J. Studin, Celebrity Estate Planning: Misfires of the Rich and Famous IV, Sep/Oct at 34.

Michael Sneeringer, Elizabeth A. Arentz, Daniel F. Hayward, Melineh S. Ounanian, and Marve Ann M. Alaimo, Mom Liked Me Better, and She Will Prove It: PreMortem Validation—Permanent Solution of Fad? Mar/Apr at 50.

Ethics James Geoffrey Durham, Lawyers Working Remotely—Navigating ABA Formal Opinion 495, May/Jun at 44.

Housing Discrimination Alex J. Schnepf, A COVID-19 Heavyweight Bout: Tenant Safety Versus Discrimination, Jan/Feb at 24.

Insurance Robert G.S. Hartzer, Property Insurance Issues: COVID-19 and the Vacancy Exclusion, May/Jun at 50.

Brent C. Shaffer, Retail Tenants and COVID-Related Business Interruption Insurance Claims: Where Things Stand after the Big Fight, Jul/Aug at 14.

Law Practice Management James Geoffrey Durham, Lawyers Working Remotely—Navigating ABA Formal Opinion 495, May/Jun at 44.

Leases George P. Bernhardt and Jack Fersko, The Impacts of the Coronavirus Pandemic on

G. Andrew Gardner, Hannah Dowd McPhelin, and Joseph M. Saponaro, Estoppels and SNDAs—Understanding and Negotiating the Landlord’s Lender’s Lease Documents, Sep/Oct at 52.

Cashauna M. Hill, Evictions and the COVID-19 Pandemic, Jan/Feb at 42.

Subleases Peter L. Kogan and Nicole D. Prieto, Subleases and Assignments: Drafting Best Practices, Jul/Aug at 36.

Jo-Ann Marzullo, Orlando Lucero, and Jo Ann Engelhardt, ABA Resolution 10H: Placating Landlords, Protecting Tenants, Jan/Feb at 55.

Surveys Wendy Gibbons and Gary R. Kent, The Effect of the New 2021 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys on Commercial Real Estate Transactions, Sep/Oct at 22.

Brent C. Shaffer, Retail Tenants and COVID-Related Business Interruption Insurance Claims: Where Things Stand after the Big Fight, Jul/Aug at 14.

Tax Michael Duffy, For Auction Houses and Art Dealers: Sales Tax Should Be a Science…

Not an Art, May/Jun at 14.

Jerome D. Whalen, A Landowner’s Guide to Ground Leases, Sep/Oct at 46.

Philip R. Hirschfeld, Lifesavers for Adverse Tax Reform: Opportunity Zone Investing and Other Options, Nov/Dec at 10.

Purchase and Sale George P. Bernhardt and Jack Fersko, The Impacts of the Coronavirus Pandemic on Real Estate Contracts: Force Majeure, Frustration of Purpose, and Impossibility, Jan/ Feb at 34.

Real Estate Development Andrew Palmieri, Steven Dube, and Brandon Brauer, Autonomous Vehicles and Parking: Preparing for a Bumpy Road Ahead, Mar/Apr at 14.

Real Estate Financing Richard Favata and Paul J. Dibbini, How Lenders Can Avoid Potential Pitfalls in Community Property States, Mar/Apr at 42.

G. Andrew Gardner, Hannah Dowd McPhelin, and Joseph M. Saponaro, Estoppels and SNDAs—Understanding and Negotiating the Landlord’s Lender’s Lease Documents, Sep/Oct at 52.

Claire M. Love and Pranav Gangele, An Overview of the Delaware Statutory Trust, Nov/Dec at 42.

Title Thomas J. Bourguignon, Real Property Recording Systems and e-Recording in the Age of COVID-19, May/Jun at 28.

Trusts Claire M. Love and Pranav Gangele, An Overview of the Delaware Statutory Trust, Nov/Dec at 42.

Brent W. Nelson, Rachel M. Sass, and Deborah Plum, Revocable Trusts for Changing Times, Sep/Oct at 40.

Valuation Rich R. Correll, A Better Approach in the Assessment and Valuation of Free-Standing, Single-User, Retail Properties, Mar/Apr at 36.

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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November/December 2021

RPTE PUBLICATIONS All RPTE publications can be purchased on the ABA Web Store, ShopABA.org, or by calling the Service Center, 800-285-2221.

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2021, 457 pages, 7 x 10, Product Code 5431121 $139.95 List Price $109.95 RPTE Members

This updated and expanded edition of Taxation and Funding of Nonqualified Deferred Compensation is a complete and current resource for using this extremely flexible planning device to best address your client’s financial goals. Written by specialists in the field, this book defines the perspective of both the employee and employer in using this planning tool. The authors demonstrate how NQDC can provide solutions to complex compensation issues and provide upto-date information on: • The ways that NQDC can be tailored to serve the needs of employers and employees, and the tax consequences for each • Differences in the timing of NQDC benefits under income tax and FICA rules • How NQDC arrangements can be structured to comply with Section 409A • Opportunities to minimize potential estate and income taxes on death benefits paid under NQDC • How Section 457 of the IRC is applicable to NQDC arrangements for tax-exempt organizations and the unique burdens this puts on state and tax-exempt employers and their employees • Issues with financial accounting and securities laws, and more

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

November/December 2021 63

THE LAST WORD Hiding the Pea, Insurer-Style: Part Two, Uncovering the Tenant’s Contractual Liability Coverage The bad news for landlords is the limited coverage that their tenants can provide to them through their liability insurance policies with the current ISO Additional Insured Endorsement, as discussed in the last issue’s Hiding the Pea, Insurer-Style: Part One, the Additional (Somewhat) Insured, 35 Prob. & Prop. 5 (Sep/Oct 2021). But all is not lost! The good news is that a landlord’s lawyer can plug some of these gaps through tenants’ indemnity agreements and the limited contractual liability coverage automatically provided under most tenant liability policies. A lawyer’s keys to plugging these gaps are, first, knowing about the policy provision that provides this coverage and, second, including a broad lease indemnity that permits the landlord to tap into this coverage.

Finding the Pea—the Contractual Liability Coverage Insurers have cleverly hidden contractual liability coverage by, first, excluding “‘bodily injury’ or ‘property damage’ for which the insured is obligated . . . by reason of the assumption of liability in a contract or agreement,” then, by providing coverage of some contractual liability as an exception to this exclusion. See Commercial General Liability Coverage Form, CG 00 01 04 13, § I.2.b (Insurance Service Office, Inc. 2012). Confusing? Yes, and the exception itself, which provides as follows, is not straightforward: This [exclusion of contractual liability] does not apply to liability for damages: . . .

The Last Word Editor: Marie Antoinette Moore, Sher Garner Cahill Richter Klein & Hilbert, L.L.C., 909 Poydras Street, Suite 2800, New Orleans, LA 70112.

(2) Assumed in a contract or agreement that is an “insured contract”, . . . . Solely for the purposes of liability assumed in an “insured contract”, reasonable attorneys’ fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of “bodily injury” or “property damage,” provided: (a) Liability to such party for, or for the cost of, that party’s defense has also been assumed in the same “insured contract”; and (b) Such attorneys’ fees and litigation expenses are for defense of that party against a civil . . . proceeding in which damages to which this insurance applies are alleged.

Id.

A lease is an “insured contract” (except for the portions that require a tenant to indemnify its landlord for fire damage to the leased premises), as are a few other types of agreements. Id. at § V.9.

What does this policy provision mean?

It means that if, in a lease, the tenant has agreed to indemnify the landlord for liability for bodily injury or property damage arising from a particular occurrence and, as part of the indemnity, has agreed to pay the landlord’s attorneys’ fees and necessary litigation expenses, then the landlord can seek payment of its reasonable attorneys’ fees and necessary litigation expenses from the tenant’s liability insurer, as well as from the tenant.

This provision applies even if the landlord is not an additional insured for the indemnified liability. But the landlord should first seek its defense costs as an additional insured because an additional insured’s defense costs do not deplete the policy limits; for example, if

the policy limits are $1,000, the additional insured’s defense costs are paid over and above those limits. If the landlord is not an additional insured for a particular claim, then the landlord may seek payment of its defense costs under the contractual liability provisions of the tenant’s policy, but these defense costs will deplete the limits of the policy; in our example, the coverage limits would have been exhausted after $1,000 of attorneys’ fees and litigation expenses. See generally Robert H. Etnyre, Jr. & Marcus R. Tucker, Eleven Issues Regarding Contractual Liability Coverage, 11 J. Tex. Ins. L. 2 (Spring 2011). For this reason, a good indemnity is a supplement to, not a substitute for, a requirement that the tenant name the landlord as an additional insured on the tenant’s liability policy.

Drafting Leases to Benefit (as Much as Possible) from a Tenant’s Liability Insurance We drafters should provide our landlord clients with lease language that gives them their best possible position under a standard tenant liability policy. We should do that by requiring the tenant not only to name the landlord as an additional insured (on a primary and non-contributing basis) but also to indemnify and defend the landlord for all claims, including those that are excluded from the standard additional insured endorsement, specifying that the indemnity includes the landlord’s attorneys’ fees and litigation expenses.

If the landlord’s lawyer provides it with both the additional insured belt and indemnity suspenders, then even if a claim is within an additional insurance gap, the landlord can be covered because of the indemnity obligations the tenant has assumed and the contractual liability provisions of the tenant’s liability policy. n

Published in Probate & Property, Volume 35, No 6 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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November/December 2021

RPTE LAW JOURNAL Don’t forget to check out the latest articles from the Digital RPTE Law Journal

Summer 2021 Articles Conservation Easements and the Proceeds Regulation Professor Nancy A. McLaughlin

Models of Electronic-Will Legislation Professor Adam J. Hirsch

To review the latest Digital RPTE Law Journal visit

www.ambar.org/rptejournal

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