Probate & Property - September/October 2023, Vol. 37, No. 5

PRIMER ON REAL ESTATE PRIVATE EQUITY FUNDS

WHAT FAIR SHARE TAXATION MEANS FOR ESTATE PLANNING

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VOL 37, NO 5 SEP/OCT 2023

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

Do Asset Protection Trusts Carry a Mandatory “Go to Jail” Card?

Should They?

2023–2025 RPTE FELLOWS

REAL PROPERTY FELLOWS

TRUST & ESTATE FELLOWS

BROOKE BENJAMIN K&L Gates LLP Washington, DC

EMMA CONNOR Prather Ebner Wilson Chicago, IL

STEVE BERTIL Troutman Pepper Hamilton Sanders LLP Philadelphia, PA

HARRY DAO McDermott Will & Emery LLP Menlo Park, CA

ARIELLE COMER Comer Law Group Dallas, TX

MOLLY DEPEW Grant, Herrmann, Schwartz & Klinger LLP New York, NY

DANIELLE DOLCH Shulman, Rogers, Gandal, Pordy & Ecker, P.A. Potomac, MD

CLAY MCKENNA Private Bank at JPMorgan Houston, TX

JANE STERNECKY Uniform Law Commission Chicago, IL

TYLER MURRAY Baker Botts L.L.P. Dallas, TX

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September/October 2023 1

CONTENTS September/October 2023 • Vol. 37 No. 5

8 18

FEATURES 8

Go Directly to Jail, Do Not Collect $200!

Do Asset Protection Trusts Carry a Mandatory “Go to Jail” Card? Should They?

47

By Alexander A. Bove Jr.

18

Show Me the Money: A Primer on Real Estate Private Equity Funds

By Janet M. Johnson

54

By Jennifer Morgan

26

The Most Important Things to Know When Insuring Lease Work Letter Construction Projects, Part One: Liability Insurance

Biden’s 2024 Green Book Tax Proposals: What “Fair Share” Taxation Means for Estate Planning

Using LLCs to Purchase and Own Rental Property

By Nathan G. Osborn

58

By James I. Dougherty and Marissa Dungey

Tax Incentives for Conservation Easements in Headlines Lately

By Juliya L. Ismailov

32

New Strategies for Reducing the Carbon Dioxide Emissions of Building Materials

By Helen J. Kessler

36

Maximizing Efficiency in Estate Administration: The Role of Paralegals

By Imaan Moughal Saleem and Robert M. Nemzin

40

Helping Good Get to Great: The Power of an Effective Mentoring Process

By Jo Ann Engelhardt, Timnetra Burruss, and Daniel Q. Orvin

44

A Brief Primer on the Fiduciary Duties of Real Estate Brokers

By Josh Crowfoot

DEPARTMENTS 4

Section News

6

Uniform Laws Update

12

Keeping Current—Property

22

Keeping Current—Probate

62

Land Use Update

64

The Last Word

Published in Probate & Property, Volume 37, No 5 © 2023 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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September/OctOber 2023

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 Kathleen K. Law Nyemaster Goode PC 700 Walnut Street, Suite 1600 Des Moines, IA 50309-3800 kklaw@nyemaster.com

Art Director Andrew O. Alcala

Managing Editor Erin Johnson Remotigue

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

Articles Editor, Trust and Estate Michael A. Sneeringer Porter Wright Morris & Arthur LLP 9132 Strada Place, 3rd Floor Naples, FL 34108 MSneeringer@porterwright.com Senior Associate Articles Editors Thomas M. Featherston Jr. Michael J. Glazerman Brent C. Shaffer Associate Articles Editors Robert C. Barton Travis A. Beaton Kevin G. Bender Jennifer E. Okcular Heidi G. Robertson Aaron Schwabach Bruce A. Tannahill

ADVERTISING SALES AND MEDIA KITS Chris Martin 410.584.1905 chris.martin@mci-group.com Cover Getty Images 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. © 2023 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.

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 37, No 5 © 2023 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.

September/October 2023 3

SECTION NEWS 2023-2024 Section Leadership The Section of Real Property, Trust and Estate Law welcomes its new leadership: SECTION CHAIR Robert S. Freedman, Tampa, FL SECTION CHAIR-ELECT Benetta Y. Park, Oak Creek, WI REAL PROPERTY DIVISION VICE-CHAIR Marie Antoinette Moore, New Orleans, LA TRUST AND ESTATE DIVISION VICE-CHAIR Ray Prather, Chicago, IL SECRETARY George P. Bernhardt, Houston, TX FINANCE OFFICER James R. Carey, Chicago, IL DIVERSITY OFFICER Kellye Curtis Clarke, Alexandria, VA IMMEDIATE PAST CHAIR Hugh F. Drake, Springfield, IL SECTION DELEGATES TO THE ABA HOUSE OF DELEGATES James G. Durham, Dayton, OH Orlando Lucero, Albuquerque, NM Rana H. Salti, Madison, WI

REAL PROPERTY DIVISION COUNCIL MEMBERS Wogan Bernard, New Orleans, LA D. Joshua Crowfoot, Signal Mountain, TN Shelby D. Green, White Plains, NY Christina Jenkins, Dallas, TX Cheryl A. Kelly, St. Louis, MO Soo Yeon Lee, Chicago, IL Jin Liu, Tampa, FL Joseph Lubinski, Denver, CO Kim Sandher, Seattle, WA C. Scott Schwefel, West Hartford, CT James E. A. Slaton, New Orleans, LA Kenneth A. Tinkler, Tampa, FL

TRUST AND ESTATE DIVISION COUNCIL MEMBERS Mary Elizabeth Anderson, Louisville, KY Carole M. Bass, New York, NY Karen E. Boxx, Seattle, WA Keri Brown, Houston, TX Abigail Earthman, Houston, TX David E. Lieberman, Chicago, IL Robert Nemzin, New York, NY Benjamin Orzeske, Chicago, IL Crystal Patterson, Louisville, KY Karen Sandler Steinert, Minneapolis, MN Mary E. Vandenack, Omaha, NE Ryan Walsh, Chicago, IL

REAL PROPERTY DIVISION ASSISTANT SECRETARY Timnetra Burruss

TRUST AND ESTATE DIVISION ASSISTANT SECRETARY Bruce A. Tannahill

Published in Probate & Property, Volume 37, No 5 © 2023 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.

4

SEPTEMBER/OCTOBER 2023

SECTION NEWS

Section Nominations Committee Pursuant to Section Bylaw §6.1(f), the names of the Section’s 2023-2024 Nominations Committee and the Section officer and council positions to be elected at the 2024 Section Annual Meeting are set forth below. Any Section member wishing to suggest a nomination should send the suggested nomination to one of the Nominations Committee members listed below.

Nominations Committee Chair: Robert C. Paul, 4 Towhee Trail, East Hampton, NY 11937, rpaullawyer@gmail.com Vice-Chair:

Hugh F. Drake, Brown Hay & Stephens, 205 South Fifth Street, Suite 1000, Springfield, IL 62701, hdrake@bhslaw.com

Members:

Mary Elizabeth Anderson, Wyatt Tarrant & Combs LLP, Ste. 2000, 400 W. Market Street, Louisville, KY 40202, banderson@wyattfirm.com Bryanna C. Frazier, B. Frazier Consulting, LLC, 2717 Frankfort Street, New Orleans, LA 70122-6517, bryanna@bfrazierconsulting.com C. Scott Schwefel, Shipman, Shaiken & Schwefel LLC, 433 South Main Street, Suite 319, Corporate Center West, West Hartford, CT 06110, scott@shipmanlawct.com

Positions to be elected for service commencing September 1, 2024 Office

Incumbent

Eligible for Re-nomination?

Chair-Elect

Benetta Y. Park

Section Chair (Automatic)

Real Property Division Vice-Chair

Marie A. Moore

Eligible for nomination as Chair-Elect

Trust and Estate Division Vice-Chair

Ray Prather

Eligible for re-nomination

Finance Officer

James R. Carey

Eligible for re-nomination

Section Secretary

George P. Bernhardt

Eligible for re-nomination

Section Delegate

Orlando Lucero

Eligible for re-nomination

Section Diversity Officer

Kellye Curtis Clarke

Not eligible for re-nomination

Real Property Council Members

D. Joshua Crowfoot Shelby D. Green Cheryl A. Kelly Joseph Lubinski

Eligible for re-nomination Eligible for re-nomination Not eligible for re-nomination Not eligible for re-nomination

Assistant Secretary

Timnetra Burruss

Eligible for re-nomination

Trust and Estate Council Members

Karen E. Boxx Robert Nemzin Benjamin Orzeske Crystal Patterson

Not eligible for re-nomination Eligible for re-nomination Eligible for re-nomination Eligible for re-nomination

Assistant Secretary

Bruce A. Tannahill

Eligible for re-nomination

Published in Probate & Property, Volume 37, No 5 © 2023 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.

September/OctOber 2023

5

UNIFORM LAWS U P D AT E Uniform Transfers to Minors Act Is Under Review The Uniform Transfers to Minors Act (UTMA) provides a simple way to transfer property to a custodial account for the benefit of a minor. It has been adopted in all 50 states, the District of Columbia, and the US Virgin Islands.

The current version of the UTMA dates to 1983, when it was approved by the Uniform Law Commission (ULC) as an update to the predecessor Uniform Gifts to Minors Act. The ULC first approved the predecessor act in 1956, which was based on an earlier model act sponsored by the major stock exchange firms to allow gifts of stock to minor recipients. The UTMA expanded on these earlier acts by including more types of property and more methods of transferring the property.

Custodial property is created by titling it in the name of an adult, followed by words like “as custodian for (name of minor) under the (name of enacting state) Uniform Transfers to Minors Act.” UTMA § 9. Property held in this form must be used for the benefit of the minor beneficiary. When the minor reaches a certain age (usually age 21, with exceptions addressed below), the custodian must transfer any remaining property to the minor.

UTMA § 20.

Uniform laws are reviewed periodically to determine whether the statutes are functioning as intended and whether courts have misconstrued the intended effect of any provision or attempted to fill gaps in the law. A ULC study committee is currently reviewing the UTMA and several non-uniform UTMA amendments that certain states 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.

have enacted over the past 40 years. The study committee will ultimately produce a report recommending whether the UTMA should be amended.

So far, the committee has identified the following issues that could be addressed by amending the UTMA: Duration of Custodianship. Section 20 of the UTMA provides for the termination of custodianships at age 21 for property transferred to a minor as a gift, by the exercise of a power of appointment, or as directed in a will or trust. Custodianships funded with other transfers may terminate sooner.

For example, the personal representative of a decedent’s intestate estate can set up a custodial account for a minor who inherits property through intestacy rather than ask the court to appoint a conservator. UTMA § 6. The custodianship option is more convenient and avoids administrative expenses.

(The court must approve transfers of property with a value over a statutory maximum amount.) Recognizing this option as a substitute for conservatorship, however, the UTMA requires the custodianship to terminate at the age of majority, as a conservatorship would. In most states, the age of the legal majority is 18.

Several states have amended their

UTMA statutes to allow for an extended duration of custodianships to age 25 and, in one state, age 30. Some states allow the transferor or custodian to extend the duration. Most of these states also included a temporary right for the minor beneficiary to compel distribution at age 21 to preserve federal tax benefits.

Portability. Some states have adopted provisions that permit a custodian to transfer property from a custodial account to a qualified minor’s trust, which could provide professional management and better integration with the transferor’s other financial objectives.

Some states allow transfers of custodial property to educational savings accounts under Internal Revenue Code Sections 529 and 529A, which were not yet available when the UTMA was last updated. Allowing these transfers gains certain tax advantages but also decreases flexibility by limiting the permitted uses of the funds.

Making UTMA accounts more portable would likely benefit some minor beneficiaries, but custodians must carefully consider their fiduciary obligations and any potential account restrictions before initiating a transfer.

Amending the UTMA to create safe harbors for these types of transfers under certain conditions could help nonprofessional custodians exercise their oversight responsibilities better.

Successor Custodians. Section 18 of the UTMA provides rules for a transferor or a custodian to designate specific successor custodians. Some states have diverged from the uniform language in an apparent attempt to clarify the rules and assign priority when multiple parties designate a successor or when a party delegates the power. At least one case involving this issue has

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September/October 2023

UNIFORM LAWS U P D AT E

been litigated, indicating greater clarity could be beneficial.

Joint Custodians. The UTMA requires only one custodian and one minor per custodianship. A few states have altered this rule to allow for joint custodians, which are particularly useful when custodianships are established for the benefit of children with unmarried or divorced parents.

Taxation and Parental Support.

Section 11 of the UTMA provides that transfers to a custodian are irrevocable, and the minor beneficiary is the legal owner of the property. This means that income from the property is ordinarily taxed at the minor’s rate. Section 14 permits the custodian to use custodial property for any purpose that the custodian considers advisable for the use and benefit of the minor but also states that the use of custodial property does

not affect the obligation of any person to support the minor.

These two provisions can have tax implications when the custodian is also a parent with an obligation to support the minor under other laws. If the parent is using custodial property to satisfy the obligation of support, the IRS has taken the position that any income from the custodial property should be includable in the parent’s gross income rather than the minor’s. This issue can be contentious, especially when parents are divorced and one of them wishes to use UTMA funds for expenses such as the minor’s college tuition.

A body of case law has developed over the past forty years to address this issue, but the courts of different states have not always reached similar conclusions. Amendments could clarify the application of the law and give greater

guidance to custodians who find themselves in this situation.

This is only a partial list of issues that the UTMA study committee is considering. At press time, the committee was seeking additional observers from institutions that administer UTMA accounts for assistance in identifying other issues with the UTMA and recommending potential solutions to clarify or improve the uniform act. Members of the ABA Section of Real Property, Trust and Estate Law with relevant expertise are encouraged to contribute their ideas.

The primary sources for this edi-tion of Uniform Laws Update were the research and memoranda of Emily S. Taylor Poppe, Professor at the University of California, Irvine School of Law and Reporter for the Study Committee on Amendments to the UTMA. n

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Published in Probate & Property, Volume 37, No 5 © 2023 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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JANUArY/FebrUArY 2021

Do Asset Protection Trusts Carry a Mandatory “Go to Jail” Card? Should They?

GO DIRECTLY TO JAIL, DO NOT COLLECT $200!

By Alexander A. Bove Jr.

S

omeone once said, “Believe none of what you read and half of what you see,” or something like that. I guess the message is to be cautious and rely only on what you can prove to your satisfaction. A recent article that caught my attention in a popular professional journal (name withheld) is an excellent example of the need to be cautious.

The article’s premise, in no uncertain terms, warns practitioners that “self-settled offshore trusts are increasingly ineffective (emphasis added) in protecting assets from creditors of US citizens, residents, and those settlors with US connections.” The article suggests that in many, if not most, cases, unless the settlor is willing to transfer the trust funds over to the court, establishing such trusts is likely to result in the settlor of the trust being jailed.

In my opinion, this information is quite misleading, if not downright false, and does a considerable disservice to practitioners who may not have more than a bit of experience with “offshore trusts.”

istockphoto

Getty Images

Who Goes to Jail?

The gist of the article is that more and more US courts are punishing US settlors of offshore trusts through a combination of contempt charges and actual imprisonment when the trust funds are not readily available to the court. Unfortunately, the few occasions where this has occurred have all dealt with settlors who have either committed criminal acts or openly defied court orders that they could otherwise have obeyed to avoid incarceration. None of them was your typical doctor, dentist, contractor, or other person simply trying to protect assets from future creditors.

One case of criminally liable settlors who thought they could lie to the court and get away with it was Fed. Trade Commission v. Affordable Media, 179 F.3d 1228 (9th Cir. 1999). It is a rare US trust and estate lawyer who hasn’t Alexander A. Bove Jr. is a partner at Bove & Langa, PC, in Boston, Massachusetts.

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September/OctOber 2023

9

heard of Michael and Denyse Anderson, the Colorado couple who spent six months in jail for failing to obey a court order to repatriate funds they placed in a Cook Islands offshore trust. When the court discovered the Andersons were not only protectors of their own trust (and therefore had control), but that they had the power to repatriate the funds, the judge reportedly said, “When you return to court next week, bring the funds from the trust or bring your toothbrush.”

Why the court order of incarceration? Because the Andersons were found guilty of conducting a criminal scam, and most of their illegal proceeds were deposited in their offshore trust. In addition, they lied to the court, falsely alleging that the terms of the trust would not allow them to comply with the court order. Their outright lie and refusal in light of their criminal behavior left the court no alternative. Would it be fair to conclude from these facts, however, that every person who established a trust to hold funds he wished to set aside and protect for his retirement should spend time in jail because someone suing him for a bad business deal couldn’t reach the funds?

The journal article highlights a number of the more popular bad-guy cases.

This type of case, made conspicuous and noteworthy by the settlor’s aggressive and uncooperative behavior, often leads to a contempt charge, sometimes jail, and news coverage. Although the more prominent and more notorious cases of thieves and tax evaders have made the news with their offshore trusts and, on the way, have spent time at the crowbar hotel, the more significant fact is that many hundreds, if not thousands, of trusts have been successfully established in various offshore (and onshore) jurisdictions successfully protecting funds without adding at all to the United States prison population.

The Contempt Threat In all of the more commonly highlighted cases where the settlor-beneficiary of the trust is jailed for contempt (i.e., for refusing to comply or falsely claiming to be unable to comply) with the court’s order, it is “civil contempt” on which the order

In the case of civil contempt, it is well-established that the settlor’s impossibility of performance is a complete defense to a contempt charge. is based, the idea being that the settlordefendant may thereby be convinced to come up with the money rather than sit in a jail cell for an indeterminate time.

Thus, jailing the settlor for civil contempt is a form of coercion rather than punishment, because the settlor “holds the keys to his cell.” The other form of contempt is criminal contempt, a form of punishment for committing an act and not for discussion here.

In the case of civil contempt, the settlor would be released on payment of the subject amount or after a period of time that indicated to the court that the settlor may never pay. An example is the Florida case of Stephan Lawrence, who transferred millions to an offshore trust just after a significant judgment was issued against him. In re Lawrence, 279 F.3d 1294 (11th Cir. 2002). Of course, the transfer was fraudulent. After making false statements and being unresponsive to a court order to repatriate the fraudulently transferred funds, Lawrence sat in jail for over six years until the court finally recognized he would never pay and released him. But Lawrence is not an exemplary case, as most would agree.

It is crucial to note that in the case of civil contempt, it is well-established that the settlor’s impossibility of performance is a complete defense to a contempt charge. See, e.g., U.S. v.

Rylander, 460 US 752 (1983). Thus, if the settlor can convince the court that he is factually unable to comply with

the court’s order (e.g., because he relinquished all control over the trust), he cannot be held in contempt. Although this may occur in many cases, it is often not that simple. One problem that typically arises, specifically in these selfsettled asset protection trust cases, is that the terms of such trusts typically take away control of the settlor to dispose of the funds. Thus, it is a “self-created impossibility” of performance. The obstacle to compliance is of the settlor’s own making. Furthermore, the timing of the settlor’s transfers is critical to the asset protection issue. As noted below, the proximity of the transfers to the subject claim may be the most important concern.

There are cases where claims arise several years after the trust was established or where there was no evidence that the settlor anticipated or knew of the claim, whenever it arose. In these cases, absent any other problematic issues, the terms of the trust would likely be upheld, and the impossibility defense would be valid. Generally, transfers made close to or in anticipation of the claim are known as fraudulent transfers and may be voidable by the court.

Those who argue against the propriety of self-settled asset protection trusts suggest that virtually every offshore asset protection trust settled by a US person is a per se fraudulent transfer and thus is an automatic exposure to be jailed for contempt if a US court is unsuccessful in obtaining repatriation of the trust funds.

This result may be likely for defiant defendants such as those covered in the subject article, but there is no support for this position in the case of good faith planning. On the other hand, like the Andersons, or like Paul Bilzerian, who was convicted of securities fraud and transferred millions to his offshore trusts despite owing millions to the US government (SEC v. Bilzerian, 112 F. Supp.2d 12 (D.D.C. 2000) (finding Bilzerian in contempt)), or like Stephan Lawrence, who transferred millions to his offshore trust in the very face of a judgment against him and who “lied through his teeth” in the words of the judge who sentenced him, or the number of others

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September/October 2023

who flaunted the rules, ignored court orders and the law, and blatantly lied to inquiring judges, leaving no choice to the courts but to incarcerate them, there is a pretty consistent record of the courts agreeing that the recalcitrant settlors may need time to think. So the court provides room and board for them while they are thinking.

Defending a Contempt Charge What often gets pushed aside by reporters in reviewing the outrageous facts and behavior in the above egregious cases is that the impossibility defense is alive and well and has been successfully used as a defense to a contempt charge if the settlor plays by the rules.

The courts have repeatedly recognized that if a debtor truly does not have control over the funds or property that the court has ordered them to produce, they should not hold them in contempt, let alone punish them. Unfortunately, the possibility of going to jail just for setting up this type of trust has become a familiar scare tactic for those who oppose the concept of self-settled asset protection trusts (those where the settlor is also a beneficiary). To those individuals, the underlying concept of such trusts is morally wrong, and that “wrong” is exacerbated to the highest degree when the settlor pleads the impossibility defense because the settlors themselves created the impossibility by establishing the trust. Nevertheless, courts recognize that this can happen without losing the protection offered by the trust, and relevant cases have found many rules that support such a defense, even though the settlor created the impossibility.

Accordingly, when faced with such a situation, the courts will consider the following: • whether the debtor/settlor acted in good faith in establishing the trust; • whether the debtor/settlor acted in anticipation of an existing, threatened, upcoming, or imminent claim against him; • whether the debtor/settlor retained adequate assets to cover regular expected expenses and reasonably anticipated claims; and, importantly,

• whether the debtor/settlor’s acts in rendering the funds or property beyond their reach were proximate to the creditor’s claim or the court’s order.

Suppose we review the facts of the devious debtor cases noted above, whose own exceedingly aggressive behavior brought them into the legal spotlight.

In those cases, it is evident that none satisfied a single criterion that might constitute a defense to the self-created impossibility. So there is no mystery to their fate.

Where to Go from Here Another essential and seemingly inescapable aspect of this whole moral question is the nature of and motivation behind the asset protection trust transfer. Suppose the law discourages such transfers or provides recourse to a creditor harmed by a person’s transfer.

When would establishing a self-settled asset protection trust be for any reason other than to make it difficult or impossible for that person’s creditors to reach the trust assets? Never, and if so, aren’t they inherently morally wrong?

And if so, why aren’t corporations, limited liability companies, and similarly protective arrangements also morally wrong? At the same time, strict adherence to this result would make every gratuitous transfer subject to the fraudulent transfer charge when a creditor comes along, even years later. But the courts have agreed that asset protection planning is entirely permissible and, in some instances, is encouraged by the state and federal governments, as in creditor-protected retirement plans, which one could argue is a self-settled asset protection trust. In one often-cited case, the court of appeals said, “…as a prudent move, he (the debtor) sought to protect his assets from unforeseen adversity….. That is not legal fraud.”

Hurlbert v. Shackleton, 560 So. 2d 1276, 1280-81 (Fla. 1st DCA 1990, Barfield, dissenting).

In one view of the preceding, there may be a pretty strong argument, not in favor of jail, but in favor of limiting the use of, or in some cases prohibiting, self-settled asset protection trusts

altogether, in light of the hundreds of years of precedent in the US and other common law jurisdictions. This longstanding precedent is based on the principle that it is against public policy for persons to have their wealth available for personal use and benefit but unreachable by their creditors. Accordingly, the terms of trusts that attempted to accomplish that result were routinely ignored by US courts, and the maximum amount payable to the settlor under the trust would be made available to the settlor’s creditors. But all that changed abruptly in 1997 when Alaska and Delaware enacted the first US self-settled domestic asset protection trust (DAPT) legislation allowing settlors to establish their own self-settled asset protection trusts whether or not they resided in the DAPT state.

Asset Protection Trusts in the Good Old USA As of this writing, 18 more states have followed suit and adopted DAPT legislation (almost 40 percent of the country and growing). One reason this “trend” by the states has taken hold so firmly is not that the DAPT is a benefit to society, but rather that so many US individuals have transferred so much money to offshore asset protection trusts that more and more of our states have decided to “relax” their moral frame of reference and abandon 400 years of precedent so that they can attract some of that money.

The DAPT states seem unbothered by the prospect that, if carefully planned, settlors of a DAPT can run up huge debts beyond their ability to pay (outside of their DAPT) and legally escape payment while enjoying their wealth as beneficiaries of the trust. The “you could go to jail” warning does not harm this because there are no “Do Not Pass Go” decisions involving a US DAPT. Nevertheless, it will be interesting to see how far US courts will go if they come across a Lawrence-type settlor who did not commit a crime and carefully followed the anti-contempt rules but ran out of non-trust money to pay his legal debts. At the same time, his comfortable lifestyle continues, and his Delaware DAPT is protecting his money. n

Published in Probate & Property, Volume 37, No 5 © 2023 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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KEEPING CURRENT PROPERTY CASES ADVERSE POSSESSION: Grazing and trailing cattle on isolated parcels within perimeter fence does not establish hostile possession. A perimeter fence built last century enclosed the Burnett Ranch plus three isolated parcels of the neighboring Warbonnet Ranch, which were not contiguous to the main body of the latter ranch. The neighboring ranch owners trailed cattle across each other’s property, and the Burnetts occasionally grazed their cattle on the disputed parcels.

In 2016, after the sale of both ranches, the owner of the Burnett Ranch denied the owner of the Warbonnet Ranch access to the disputed parcels. The Warbonnet Ranch owner sued for declaratory judgment and to quiet title, and the Burnett Ranch owner counterclaimed for adverse possession of the three disputed parcels. After a five-day bench trial, the trial court held for the Warbonnet Ranch owner, essentially on the ground that the Burnetts had failed to establish hostile possession of the parcels. The supreme court affirmed, explaining that the possession required for adverse possession must be calculated to put the record owner on notice of the adverse claim; it must be so incompatible with or so in defiance of the rights of the true owner as to clearly signal an intent to claim the property, such that the owner should take action to protect his title. Significantly here, the parcels were not separately fenced within the Burnett Ranch, testimony showed that the perimeter fence was not on the true boundary line because of the terrain, and the neighbors traded land use to facilitate and Keeping Current—Property Editor: Prof.

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

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

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

maximize the use of forage. The fence was maintained to keep the neighbors’ respective cattle in certain areas on the particular ranches, not as a claim of ownership. The failure of the claimants to make a prima facie case meant that the record owner was not required to explain or rebut the claim through a showing of permission.

Little Medicine Creek Ranch v. D’Elia, 527 P.3d 856 (Wyo. 2023).

EQUITABLE SUBROGATION: Replacement mortgage doctrine does not protect first mortgagee who refinances its own mortgage loan. The Baileys mortgaged their residence to Quicken Loans for $256,500, with the mortgage recorded on October 20, 2009.

One week later the Baileys entered into an equity line of credit (LOC) with ArrowPointe for $99,000, secured by a mortgage recorded on November 4, 2009. On November 23, 2009, the Baileys refinanced the Quicken loan, granting a new mortgage to Quicken of $296,000. At closing on the refinanced loan, the Baileys executed an acknowledgment indicating the only outstanding lien on the property was the first Quicken loan, which was not correct. ArrowPointe was unaware of the transaction as Quicken did not inform it of the refinance or request it to execute a subordination agreement. The first Quicken mortgage was released, and the refinanced mortgage was recorded on December 15, 2009. When the Baileys defaulted on the LOC, ArrowPointe filed

suit, seeking foreclosure and a declaration that its loan had priority over the Quicken loan now held by Quicken’s assignee, US Bank. US Bank asserted priority based on the “replacement mortgage doctrine.”

ArrowPointe based its claim on the recording act. The trial court held that South Carolina does not recognize the replacement mortgage doctrine and granted summary judgment to ArrowPointe.

US Bank appealed, the court of appeals affirmed, and the supreme court also affirmed. The court noted that South Carolina has a race-notice statute, which gives priority based on prior recording without notice, with only the exception being equitable subrogation. This state never expressly applied the replacement mortgage doctrine, even though recognized by the Restatement (Third) of Property: Mortgages § 7.3 (1997), and the court was reluctant to adopt it now on account of the difference in consequence to junior mortgagees. Although there is an intervening mortgage, such as ArrowPointe, in both scenarios, under the equitable subrogation doctrine, a substitute mortgagee steps into the shoes of the original mortgagee, and the original mortgage remains intact in all respects relative to the race-notice statute; the mortgage remains unsatisfied, and a new mortgage is not recorded. The position of the junior mortgagee is not affected. Under the replacement mortgage doctrine, however, the original first mortgage is satisfied of record and replaced with a new mortgage that is recorded after the intervening mortgage. Although the new mortgage may have similar terms as the original first mortgage, that is not always so and the junior mortgagee may be adversely affected. The court believed that the replacement mortgage doctrine needlessly invites litigation that could be easily avoided by a thorough examination of the record or execution of a subordination agreement. Any adoption was best for the legislature. ArrowPointe Fed. Credit Union v. Bailey, 884 S.E.2d 506 (S.C. 2023).

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HOMESTEADS: Rented-out portion of residential property is not eligible for homestead tax exemption. Rebholz owned a two-story residence, which county tax officials originally characterized as a single-family home. Rebholz lived on the bottom floor. The upper floor had a common area, four individual rooms with living areas and bathrooms, and kitchenettes. Each room was lockable from the outside, and the top floor had an independent doorbell. Rebholz periodically rented upper-floor units to at least one tenant. Learning of this arrangement, the county property appraiser revoked a portion of Rebholz’s tax exemption, recalculated his taxes for several years, and notified him of a tax lien on the property of approximately $7,000. Rebholz filed suit, seeking reinstatement of the homestead exemption to the full property as opposed to the 85 percent the appraiser deemed applicable. The circuit court entered judgment for Rebholz, stating that merely sharing a residence with a tenant does not create a class of property that is not exempt. A divided appellate court affirmed, despite the dissent’s noting that one could not simultaneously live in a residence and rent out that residence for another’s exclusive use as a residence. The supreme court quashed the appellate decision and remanded. The court found that the Florida tax-exemption statute requires residency, Fla. Stat. § 196.011, and Rebholz surely did not use a portion of his property as his residence. Further, the statute, which implements the constitutional homestead tax exemption, states that the exemption applies to the portion of the property that is classified and assessed as owner-occupied residential property.

Id. § 196.031. The property’s physical structure or labels are not determinative.

Despite the single-family label, Rebholz effectively ran a boarding house; it was not just a sharing arrangement. Furst v.

Rebholz, 361 So. 3d 293 (Fla. 2023).

LANDLORD-TENANT: Statutory presumption of one-year tenancy for agricultural leases is rebutted by actual intention of parties for month-to-month tenancy. The parties entered into an oral lease of a building for the indoor cultivation of cannabis. The property was a large

industrial building with wooden floors surrounded by an asphalt parking lot, and the tenant grew cannabis inside potting cubes that could be moved around the building and not in the ground. When, after two years of negotiations, the parties were unable to agree to a written lease and a master service agreement, the landlord served the tenant with a 30-day notice to quit. After the tenant refused to vacate the property, the landlord instituted an unlawful detainer action. In its answer, the tenant alleged it could not be evicted because it was in lawful possession of the property under the statutory presumption of a one-year tenancy for “agricultural … purposes,” Cal. Civil Code § 1943, and under a presumption of a one-year holdover tenancy for use of “agricultural lands.” Cal. Code Civil Proc. §1161(2). The trial court denied the tenant’s motion for judgment, finding that the tenant failed to rebut the general presumption that an oral lease is month-to-month. The agricultural lease presumption did not apply because the tenant’s cannabis operation was not an “agricultural use of land” because it did not grow the cannabis in the ground.

The appellate court affirmed, noting that, under Cal. Civil Code § 1943, a lease, other than for lodgings and dwelling-houses, is presumed to be a month-to-month tenancy, but, in the case of real property used for agricultural or grazing purposes, a lease is presumed to be for one year. The court explained, however, that it need not decide whether Coastal Harvest was engaged in the business of agriculture. For purposes of § 1943, “the intention of the parties is the controlling factor,” and evidence that the parties agreed to a longer term will rebut the general presumption of a month-to-month term for an oral lease. Likewise, evidence that the parties agreed orally to a term of less than one year may rebut the presumption of a oneyear lease for agricultural land. Although disputed by the tenant, substantial evidence showed that, although the negotiations for a written lease were ongoing, the parties mutually understood that the oral lease was for a month-to-month term and would be terminated unless a written lease was eventually signed. And, assuming, without deciding, that the cannabis operation was an “agricultural” use of the

property, the same evidence also rebuts that presumption. 65283 Two Bunch Palms Building LLC v. Coastal Harvest II, LLC, 308 Cal.Rptr.3d 242 (Ct. App. 2023).

MARKETABLE TITLE ACT: Act does not extinguish unused public road shown on plat. The Plat of Trout Lake Park, filed in 1912, was dedicated to the public use forever of public roads located on the plat. Some of the lots were ultimately used as a resort. In the 1980s the resort owners and the county agreed to vacate some of the lots and roads but not one across parcel 3 of the plat that provided access to Trout Lake. In 2013, the resort owner died, and the trustee winding up her estate contracted to sell the resort.

No physical road was ever constructed on parcel 3, and the trustee maintained that the public way that had existed on parcel 3 was extinguished by the Marketable Title Act, Minn. Stat. § 541.023. The act forecloses the commencement of actions to enforce a right, claim, or interest in land founded upon any instrument, event, or transaction that took place more than 40 years before the commencement of the action unless that claim is preserved by the filing of a notice of claim. The county title examiner determined the trustee was in effect seeking a road vacation that required compliance with the roadvacation statute, Minn. Stat. § 505.14.

The parties filed suit in opposition, and the trial court granted summary judgment for the trustee. The court of appeals affirmed, stating that the plain language of the act applies to dedications by recorded plat. The supreme court reversed and remanded. The act does not expressly reference plats as included or excepted from its coverage, but the court found it reasonable to conclude that the absence meant plats were not originally intended to be covered. When first enacted in 1943, the act aimed to simplify title searches by promoting efficiency and certainty. But interests recorded on plats do not increase the costs of title searches, and re-recording these interests would increase, instead of reduce, the burdens associated with title searches. The court also emphasized that the recording process for plats is substantially different from the recording process listed in the act, further indicating that

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the act does not cover plats. Additionally, the court noted, the public interest was particularly strong here—towns, cities, and counties have well-settled expectations regarding the public’s right to platted access as few, if any, were re-recorded as contemplated by the act. Applying the act would limit or remove public access to many public waters. For all these reasons, the act could not be read to extinguish public-interest property dedicated by plat.

In re Moratzka, 988 N.W.2d 42 (Minn.

2023).

RECEIVERSHIP: Bondholders’ claims to proceeds from sale are prior to unsecured claims of residents of property. The Atrium arranged for bond financing for its construction of an assisted-living community. It mortgaged its real estate and granted a security interest in its personal property, revenue, and proceeds as collateral for the repayment of the bonds.

Bank One purchased $8,050,000 in Atrium bonds and perfected its security interest in Atrium’s assets. Atrium required residents to pay from $40,000 to $238,000 as entrance fees and collected a total of $7.5 million in fees at the time of the suit. Atrium defaulted on its debt service payments and commenced a voluntary assignment in court for the benefit of creditors. The residents of Atrium filed claims for entrance fee refunds totaling more than $7 million. The bondholders filed their proof of claim totaling more than $6 million. The court appointed a receiver, who sold the Atrium assets and then moved for declaratory relief as to the order of priority for distributing the $5 million in net sales proceeds.

The court ruled that the bondholders’ lien was superior to the residents’ entrance fee claims, and the residents were not entitled to a constructive trust over the sales proceeds. The residents appealed the court’s decision and the appellate court reversed, finding the residents’ claims superior to the bondholders. The supreme court reversed, stating the receivership statute determined the order of priority. Under Wis. Stat. §128.17, secured creditors, like the bondholders, have the first right to

the collateral for the outstanding debt.

Unsecured creditors, like the residents, are entitled to the distribution of proceeds only after priority claims are satisfied. The court also rejected the residents’ argument that the bondholders’ claims were subordinated based on language in several documents executed in connection with the development of the project and its financing, which only stated ways in which the liens might be subordinated but did not actually effectuate a subordination. The court concluded that nothing in law or equity authorized the court to disrupt the statutorily prescribed priority of secured lenders. In Re Atrium of Racine, Inc., 986 N.W.2d 780 (Wis. 2023).

REFORMATION: Scrivener’s error in legal description is mutual mistake subject to reformation. In 2005 at about the same time, Burt and Lacoste entered into agreements to purchase neighboring properties on Standring Street from Tondreau. In preparation for the two closings, Tondreau’s attorney prepared two warranty deeds that contained the proper legal descriptions of the respective properties—“lot 23 of the Plan of Bluestone” to Burt and “lots 21 and 22 of the Plan of Bluestone” to Lacoste. For reasons not clear, however, the closing agent from Nationwide Title & Escrow Company changed the legal descriptions of the properties being conveyed—the deed to Burt indicated that lot 21 (and not lot 23) was being conveyed, and the deed to Lacoste indicated that lots 22 and 23 (and not lots 21 and 22) were being conveyed. Burt’s mortgage and title policies repeated the incorrect property descriptions.

Four years later, in the course of a foreclosure on Burt’s mortgage loan, the errors in the legal descriptions were discovered. Nationwide purported to fix the problem by substituting correct legal descriptions for the erroneous ones and, without informing Burt, Lacoste, or Tondreau, recorded the corrected deeds and mortgage. Burt and Lacoste commenced individual civil actions against Nationwide, the closing attorney, the original and present mortgagees, and the title insurer, alleging

that the re-recorded deeds and mortgage were void because they were not “signed or acknowledged” by the makers, they were a fraud on the public, and the rerecorded mortgage and accompanying promissory note were a renunciation of the debt. Burt and Lacoste sought rescission based on misrepresentation. The mortgagee filed a counterclaim seeking reformation of the instruments based on mutual mistake and a declaration that the instruments, as reformed, confirmed and established interests in the intended lots. The trial court ordered reformation, finding no fraud or misrepresentation and denying rescission. Affirming, the supreme court explained that there is a presumption that “a written instrument as drawn and executed, especially a deed, correctly states the real intent of the parties” but that there are occasions, such as mutual mistake of the parties, when judicial reformation of such an instrument is appropriate. A mutual mistake is one common to both parties, who share a misconception respecting the same terms of their written agreement. It is irrelevant that the actual mistake was not made by the parties, but rather by a closing agent, who in effect served as a scrivener. The mistake here was “mutual” in the sense that all the parties shared the mistaken belief that the legal descriptions in the warranty deeds and mortgage were accurate. Reformation merely made the deeds and the mortgage convey the meaning intended by the parties. Burt v. Furtado, 292 A.3d 640 (R.I. 2023).

SALES CONTRACTS: Buyer has right to specific performance without proving that damages are inadequate remedy.

The Robisons desired to sell their home if they could purchase a nearby vacant lot on Snowmobile Lane to build their “forever home.” A few days after they listed their property for sale, the Morningstars made an offer to purchase, to which the Robisons made a counteroffer that the Morningstars accepted. The contract had no provision making the sale contingent on the Robisons’ acquiring the Snowmobile Lane lot. Just before closing, the Robisons tried to cancel the contract because the Snowmobile Lane lot had been sold to someone else,

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but the Morningstars insisted on closing, even though the Robisons claimed that their realtor intentionally failed to insert a contingency clause into the contract. After the Robisons did not appear at the closing, the Morningstars filed suit, seeking a declaratory judgment that the Robisons breached a binding contract and asking for specific performance. In their answer, the Robisons asserted that the contract should not be enforced because of misrepresentations by their realtor and that ordering specific performance would be unconscionable because the Morningstars had other available remedies. The parties’ contract stated that in the event of default by the seller, “the Buyer shall have the right, at Buyer’s option, to either terminate this Contract and recover 100% of Buyer’s earnest money deposit held by Escrow Agent or to specifically enforce the terms and provisions of this Contract and proceed to Closing.” The trial court found a breach of contract but denied specific performance because the Morningstars had failed to show that an award of compensatory damages was an inadequate or impractical remedy or that there were special equities that demanded specific performance. The supreme court reversed. The court explained that the equitable remedy of specific performance aims to place the party without fault in as nearly the same position as the party would have been absent the other party’s default. In contracts for the sale of real property, courts generally presume that a remedy at law is inadequate; no specific allegation of the inadequacy of legal remedy is necessary. This is so because land is assumed to have a peculiar or unique value without reference to its actual quality or quantity. The trial court committed an error by placing the burden on the Morningstars to prove that damages were inadequate or impractical. That error led to the trial court’s denying specific performance and finding that the equities favored the Robsions. The trial court in effect rewrote the parties’ contract to include a contingency to allow the Robisons to cancel because their preferred replacement lot was unavailable.

Courts are not at liberty to rescue parties from the consequences of a poorly made

bargain or a poorly drafted agreement by rewriting a contract. Morningstar v.

Robison, 527 P.3d 241 (Wyo. 2023).

TAKINGS: County’s appropriation of surplus over tax debt after foreclosure constitutes a taking. In 1999, Geraldine Tyler bought a one-bedroom condominium in Minneapolis, but ten years later, at the urging of her family, moved to a senior residential community. Her family failed to pay the property taxes on the condominium, and by 2015, there were about $2,300 in unpaid taxes plus $13,000 in interest and penalties. Acting under Minnesota’s forfeiture procedures, Hennepin County seized the condo and sold it for $40,000, extinguishing the $15,000 debt. The County kept the remaining $25,000 for its own use.

Tyler sued Hennepin County and its officials, alleging an unconstitutional taking of the excess value of her home under the Fifth Amendment and a claim under the Excessive Fines Clause of the Eighth Amendment. The federal district court dismissed the suit for failure to state a claim. The Eighth Circuit affirmed, ruling: “Where state law recognizes no property interest in surplus proceeds from a tax-foreclosure sale conducted after adequate notice to the owner, there is no unconstitutional taking.” The court of appeals also rejected Tyler’s claim under the Excessive Fines Clause, adopting the district court’s reasoning that the forfeiture was not a fine because it was intended to remedy the state’s tax losses, not to punish delinquent property owners.

The Supreme Court reversed. The Court acknowledged that states have long imposed taxes on property and that such taxes are not themselves a taking but are a mandated “contribution from individuals . . . for the support of the government . . . for which they receive compensation in the protection which government affords.” The concern here, though, involves the money remaining after the county’s sale of Tyler’s home to satisfy her past-due taxes and costs.

That remaining value is property under the Takings Clause, protected from uncompensated appropriation by the

state. The Court noted that the Takings Clause does not itself define property and while state law is one important source for this determination, it cannot be the only source. Otherwise, a state could “sidestep the Takings Clause by disavowing traditional property interests” in assets it wishes to appropriate. Even though the county had the power to sell Tyler’s home to recover the unpaid property taxes, it could not confiscate more property than was due.

The Court found support for this limiting principle in ancient English history and the early laws and colonial constitutions of several states. The Court declared that a taxpayer who loses her $40,000 house to the state to fulfill a $15,000 tax debt has made a far greater contribution to the public fisc than she owed. The taxpayer must “render unto Caesar what is Caesar’s, but no more.”

This result obviated the need to rule on the Eighth Amendment claim. Tyler v.

Hennepin County, Minnesota, 143 S. Ct. 1369 (2023). Two weeks after this decision, the Court vacated the judgments in two Nebraska cases on the same grounds, Nieveen v. Tax 106, 974 N.W. 2d 15 (Neb. 2022), vacated, 2023 U.S. LEXIS 2318 (U.S. June 5, 2023); Fair v.

Continental Resources, 971 N.W.2d 313 (Neb. 2022), vacated 2023 U.S. LEXIS 2382 (U.S. June 5, 2023).

WASTE: Life tenant’s failure to pay property taxes is not waste that justifies forfeiture of life estate. Theodore Nelbach held the life estate and Willow Nelbach the remainder interest in property used as a rental unit. Theodore failed to pay taxes, resulting in an accumulated arrearage, with interest of $7,000. The city issued a notice of delinquency and warned that the failure to pay could result in the sale of the property. After unsuccessfully demanding that Theodore pay the taxes, Willow submitted a payment and thereafter filed a complaint against Theodore under a statute that authorizes the forfeiture of a life estate and treble damages when a life tenant commits waste. D.C. Code § 42-1601.

The trial court granted summary judgment to Willow, and Theodore appealed.

The court of appeals reversed. Acknowledging that statutes are to be construed

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according to their ordinary sense, the court questioned the application of that principle in this case because the waste statute dated back to the English Statute of Gloucester enacted in 1278, a time very different—when society was largely agrarian and governed by feudalism. In fact, property taxes did not exist then. The court then surveyed the meaning of waste around the country and found that, historically, waste involved acts that caused physical injury to the property. Even as that meaning has evolved, most states still require some harm to the property that is lasting enough to damage the future interest. Only two states have found forfeiture of the life estate in the circumstances in the case. Given the multi-layered system of protection for property owners in tax foreclosure in the jurisdiction, in particular, the opportunity to redeem the property, the court could not say that mere tax arrearage constituted actionable waste. Although the ancient text of the Statute of Gloucester has remained largely unchanged over time, it could not now be read to intend the drastic consequences of forfeiture “each and every time one cent is missing from a tax payment.” The court dismissed as speculative Willow’s concern about having to wait until the property was lost before seeking relief, Nelbach v.

Nelbach, 291 A.3d 1129 (D.C. 2023).

LITERATURE BROWNFIELDS: Brownfield projects offer significant potential for sustainable property development. In Beyond Brownfields Redevelopment: A Policy Framework for Regional Land Recycling Planning, 5 J. Comp. Urb. L. & Pol’y 468 (2022), Joseph Schilling offers a strategy for the efficient repurposing of brownfields to productive use. He begins by outlining the three waves of the development of brownfield policies, showing how each was lacking in some respect, leading to rethinking in the next phase. The first wave, from 1995 to 2002, focused on pilot programs and grants for assessment and cleanup.

The second wave aimed to institutionalize brownfield redevelopment with the Brownfields Act of 2002. The third wave, from 2006 to 2019, saw the integration of brownfields into broader land

revitalization efforts. Schilling suggests the need for a cohesive policy and planning framework for recycling and repurposing vacant properties, abandoned buildings, and vacant land—expanding the brownfields policy beyond brownfields to link redevelopment and revitalization to other emerging urban planning and policy movements, such as sustainability, climate change, and equitable development. This would address land shortages for housing and economic inequalities in climate-vulnerable communities. Toward this end, Schilling describes a National Brownfields Regional Planning Act. This act would involve four interdependent components: crafting a national strategy for land recycling, developing regional land recycling plans, chartering regional land recycling consortiums, and investing in and elevating the roles of capacity-building intermediaries. These ideas are insightful and worthy of serious examination.

In Redeveloping Brownfields and Other Contaminated Sites for Renewable Energy Projects: Benefits and Liability Protection, 52 Tex. Envtl. L.J. 1 (2022), Katelyn Fulton discusses how using brownfields and other contaminated lands may factor into the growing demand for renewable energy sources, in particular for project siting. The author states that the use of contaminated sites (and there are more than 450,000 in the country) offers many advantages and cost savings—they often already have the infrastructure, such as substations, roads, and power lines in place, and land costs are cheaper due to the contaminated status. The Re-Powering initiative of the Environmental Protection Agency (EPA) is an important aid in this respect, as it identifies potentially contaminated sites with renewable energy generation potential. To be sure, there are obstacles to this use, most significantly the cleanup costs and burdens.

The 2002 Brownfield Amendments created liability protections for “bona fide prospective purchasers,” but these may not apply to renewable energy developers seeking to develop brownfields with specific site conditions. Other liabilitylimiting mechanisms, however, including contractual indemnity provisions, comfort letters from EPA or governing state entities, ready-for-reuse determinations,

negotiation of partial deletion from the Superfund National Priorities List, and administrative agreements between developers and regulators, may serve to fill the gap. And there are a host of programs and incentives (including taxes and grants) to turn otherwise unusable sites into energyproducing systems. The author suggests the need for more carve-outs and liability exceptions under the Comprehensive Environmental Response, Compensation, and Liability Act and other cleanup laws to encourage renewable energy developers seeking to build site renewable projects on brownfields and contaminated lands. In these ways, sustainable brownfield redevelopment becomes realistic.

INSURANCE: In Insuring Justice, 101 N.C.L. Rev. 729 (2023), Prof. Allyson E. Gold asserts that because many landlords do not carry liability insurance, their tenants have little chance of recovery after being harmed by dangerous housing conditions. She states that disabling injuries are more frequent in homes than in the workplace and motor vehicles combined. Even as a tenant might be able to hold a landlord liable for injuries suffered during the tenancy, collecting on the judgment is often an impossible hurdle. The risk of not being insured affects low-income, minority tenants disproportionately. This state of affairs is made possible in part by the absence of state laws requiring landlords to carry liability insurance, which leads to property owners reaping the financial benefits of the long-term rental housing market while passing the risk of injury and cost of harm to their tenants. There is a troubling incongruity in the treatment of short-term rentals, such as Airbnb, where a growing number of states are requiring liability insurance, compared to long-term rentals. Underlying all of this, Prof. Gold suspects a degree of racial bias in insurance regulations. She suggests that liability insurance coverage should be properly understood as an access-to-justice issue that negatively affects the health of minority long-term renters. The article gives a history of property insurance and reveals the pernicious practice of insurance redlining that impairs the availability of property insurance in minority neighborhoods. This history and the descriptions of frightening substandard housing conditions across the

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country make the case for mandated liability coverage to fill the gap created by market failure in the case of long-term rentals. She is not concerned that mandated insurance might increase rents, any more than the effect of the requirement that landlords keep premises habitable.

LAND USE: Balancing the interests in regulatory control and facilitating the development of affordable housing options have long been in tension. In Small Suburbs, Large Lots: How the Scale of Land-Use Regulation Affects Housing Affordability, Equity, and the Climate, 22 Utah L. Rev. 1 (2022), Eric Biber, Giulia Gualco-Nelson, Nicolas Marantz, and Moira O’Neill shed light on the unintended consequences of excessive land-use regulations on housing availability and affordability. The authors assert that overly burdensome local regulations produce a host of negative externalities, including hindering housing supply, leading to increased prices and exacerbating socioeconomic inequalities. Local governments do not have strong incentives to provide an optimal level of housing. The article offers a primer on the history and theory of land use and shows how various land use tools, in particular rigid zoning, have operated to produce the negative externalities, which we are now seeing as affecting not only the housing supply but also the climate crisis.

The authors survey the literature on the economic analysis of land use regulations and suggest several strategies to mitigate their negative effects, starting with greater state or regional roles in land use regulation and reducing local control. They outline several measures that can serve to facilitate housing access and lower costs, as well as work to respond to climate change and societal inequalities —from energy efficiency in housing construction and transportation, land use standardization across projects and communities, and protections against displacement of vulnerable populations by new projects.

SALE-LEASEBACK: In Sale-Leaseback Transactions: Solutions to Liquidity And Returns?, 22 Appalachian J. L. 1 (2023), Judge John M. Tyson analyzes the merits and cautions of sale-leaseback transactions. A sale-leaseback means the sale of a real property asset and concurrent leasing

back of the real property to the seller for a defined term of use. These devices allow businesses with substantial real property assets to enjoy the use of real property while avoiding the burdens and limitations of ownership. Among the benefits to the seller-lessee are the reduction of occupancy costs and the diversification of asset portfolios. These benefits may be secondary to the tax advantages—the lessee can deduct rental payments and occupancy expenses to reduce income at a faster rate than the reduction rate from deducting interest on debt service and longer-term depreciation and amortization from owning the real estate.

Benefits to the purchaser-lessor include income streams from the lease, depreciation, potential tax credit and deferral incentives, and appreciation accruals to the residual value of the real estate. Saleleaseback transactions are used for a wide array of properties, including office buildings, retail centers, and manufacturing facilities. The article offers advice on the provisions a knowledgeable buyer will insist on including in the deal, including who will pay for the day-to-day expenses of managing and operating the property and property taxes during the lease term.

Among the precautions the seller-lessee should take is to record a memorandum of the lease and to include clauses dealing with subordination and rights in case of bankruptcy. Perhaps the most important advice given is that clear language should be used to ensure that the agreement is enforced as a sale-leaseback and not some other kind of financing.

LEGISLATION ARKANSAS adopts the Uniform Relocation of Easements Act. A servient estate owner, at his expense, may relocate an easement under this chapter, if the relocation does not materially lessen the utility of the easement, burden the easement holder, or otherwise impair the value or use of the easement or the interests of security holders. A civil action is required. 2023 Ark. Acts 505.

MAINE makes creditors, assignees, and servicers liable for failure to timely make payments from an escrow

account. The law requires these persons to rectify the results of any failure, including causing corrections to the consumer’s credit report and causing the discharge of any liens against the consumer’s real estate. The holder of escrow funds for the payment of insurance premiums must notify the insurer that provides the insurance coverage upon the sale or transfer of the mortgage loan by providing a copy of the document evidencing the sale or transfer. 2023 Me. Laws 69.

MONTANA amends real property law to define material facts for disclosure.

A material fact is that which should be recognized by a broker or salesperson as being significant enough to affect a person’s decision to enter into a contract to buy or sell real property. It includes a fact that materially affects the value of the property, affects its structural integrity, or presents a documented health risk to occupants of the property. It also includes a fact that materially affects the buyer’s ability or intent to perform the buyer’s obligations under a proposed or existing contract. 2023 Mt. Laws 375.

NEW MEXICO adopts a scrivener’s error affidavit. The affidavit may be used to correct minor drafting or clerical errors or omissions in recorded instruments, including legal descriptions, misspellings of names, parties’ addresses, a party’s marital status, a missing exhibit or addendum, and the legal type or state of domicile of a corporation or other legal entity. The law states who may execute such an affidavit and prescribes a form of affidavit.

2023 N.M. Laws 153.

WASHINGTON amends property law to specify priority of loans under future advance clauses. The first-intime, first-in-right rule of priority applies to all mortgages and deeds of trust and any future advances thereunder without regard to whether such future advances are optional or obligatory. The amendment does not repeal any other statute that expressly provides for special priority over mortgages and deeds of trust.

2023 Wash. Ch. 76. n

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SHOW MEthe MONEY Getty Images

A Primer on Real Estate Private Equity Funds

By Jennifer Morgan

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T

he modern era of real estate private equity funds grew from the savings and loan (S&L) crisis of the late 1980s. Closed-end private equity-style funds were formed to buy assets from the Resolution Trust Corporation, which Congress had created to sell the real estate assets of closed S&Ls. Shortly after that, a number of real estate opportunity funds were formed to take advantage of the real estate market distress of the early 1990s. Those funds were largely successful, achieving large equity multiples and internal rates of returns, and many other sponsors joined the market. The real estate fund market has continued to grow; even after the slowed real estate investment activity at the end of last year, according to Preqin, during the final quarter of 2022, 76 real estate funds closed, raising a total of $46.9 billion.

A real estate private equity fund provides a sponsor with a discretionary pool of capital with very few required investor consents. The fund sponsor is relieved of raising capital on a deal-by-deal basis and does not have to seek the consent of its equity capital investors concerning a multitude of “major decisions” that are typically required in the single asset joint venture context. What’s not to like? This article provides an overview of the real estate private equity fund formation process, including common terms that govern the structure and regulatory considerations.

Fund Terms A real estate private equity fund is a commingled investment vehicle established to deploy investors’ capital on a blind pool basis in various real estate assets. The terms of the fund result from a negotiation process between the

Jennifer Morgan is a partner at King & Spalding in New York City. She specializes in real estate private equity and advises clients on structuring and negotiating fund formations and other capital transactions, including private real estate investment trusts and other structured investments.

sponsor and the fund investors. Still, there are certain key terms customarily included in the fund documentation.

The sponsor typically seeks freedom in its investment process and operations and the ability to earn fees (including for affiliated services providers) and promote. The investor wants a good return on its investment but also wants protections around fees and expenses and some control over the investment and management process.

Many investors also desire access to coinvestment opportunities alongside the fund, which typically come with better economics through reduced fees and promotion.

As with any negotiated transaction, what is “market” changes over time and depends on the parties’ relative bargaining power. A mega-fund manager with a successful track record and tens of billions of dollars of real estate assets under management is largely going to be able to dictate terms to its investors.

In contrast, a smaller or newer manager must offer more investor-friendly terms. Despite that potential range, the basic terms of each fund typically include the following: Purpose, Exclusivity As with any venture, the stated purpose of the partnership provides the general partner with legal authority to cause the partnership to take specific actions.

Although the sponsor wants broad authority, the purpose provisions often tie to exclusivity, which the sponsor will likely want to be narrow. To make exclusivity work, all parties need to think about the fund’s investment horizon and other potential competing products or strategies that may become relevant during that time.

Marketing Period, Subsequent Close Mechanics Most funds have a marketing period during which the sponsor can continue to close on additional capital commitments. This marketing period is typically around 12 to 18 months.

The fund may invest and close on more capital commitments during that time.

Investors coming in at later closings may have visibility on actual investments they will be buying into and get the benefit of knowledge of any market changes that may have occurred since the first closing. To induce investors to commit to a first closing, sponsors often offer those investors certain economic benefits, such as a management fee holiday. Investors in subsequent closings must compensate the investors who made commitments in earlier closings in the form of the return of the applicable portion of any capital contributions made by the original investors, plus a cost of carry thereon (typically the first hurdle rate for the promotion). If values have increased significantly, the general partner usually has the discretion to charge investors making commitments at later closings for their pro rata value of the investments instead of cost-plus carry, though that is rarely exercised.

Investors committing at later closings will also be subject to management fees as if they had entered the first closing (with an interest component).

Fund Size, Investment Period A key component of a fund’s investment strategy is often market timing, which means that the sponsor sees the investment strategy as providing for the deal flow of a certain amount of investment over a certain period. The fund’s investment period is a set timeframe (often two or three years) during which the general partner can deploy capital for new investments. That period also ties to the fund’s overall size, and investors may seek to impose a cap on the amount of capital that may be committed to the fund to ensure that all capital is deployed on time.

After the investment period, the uses for which the general partner may call capital are more limited; typically, the general partner can call capital for investments in process and follow-on investments but not otherwise for new investments. Development and valueadd fund sponsors should be careful to ensure they can access funds for projects that extend beyond the investment period.

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Term Fund investors are mainly passive and do not have control rights over investments or the disposition thereof. In addition, investor transfer rights are usually subject to the approval of the general partner, and there is no liquid market for limited partner fund interests even if a transfer is approved. The fund’s term is, therefore, critical, as it provides investors with some time horizon for the return of their capital. A typical closed-end fund term is ten years, with some extension rights for the general partner. Most fund documents also permit orderly liquidation to avoid a “fire sale” situation, so investors should not expect a return of capital by a fixed date.

Investment Limitations Most fund documents will provide for limitations on investments that may be made within the defined strategy. These cover a typical range of topics such as geography, product type, and leverage restrictions but are customized to each sponsor and strategy. The limitations provide a box around the discretion afforded the fund sponsor and should be reviewed carefully to ensure clarity for the sponsor and investors.

Distribution Waterfall Most real estate funds have a fully pooled distribution waterfall, so all capital plus a preferred return must be returned to the investors before the sponsor is paid any promotion. There is still a chance of overpayment if there is an early sale of an investment, so most fund agreements will provide for a clawback of any excess from promotion from the general partner (and some may also ask for a guaranty from the sponsor for the clawback). Real estate fund waterfalls are generally less complicated than single-asset development joint ventures.

Most funds end with an 80/20 split in favor of the sponsor. The availability of a “catch-up” tier to get the general partner to the 20 percent faster depends on the market and bargaining power.

Fees and Expenses Most funds pay an asset management fee to the sponsor, typically a percentage

breach of a key person provision is suspending or terminating the investment period.

of capital commitments during the investment period, switching to a percentage of invested capital afterward.

Many sponsors have affiliates who provide real estate services, such as property management, development management, and construction, and the fund documents will permit the sponsor affiliates to deliver those services at agreed fees.

The fund document will also govern which expenses are to be borne by the fund (and, therefore, the investors) and which are to be borne by the sponsor. Recent SEC scrutiny of expenses has led to tremendous detail and disclosure around these provisions. The sponsor will bear organizational and offering costs incurred in connection with the fund’s formation over an agreed cap and any placement agent fees.

Advisory Committee Fund investors have limited rights concerning the investments and operations of the fund. Still, many funds have an advisory committee of representatives of select limited partners (often those who commit above a certain amount of capital to the fund). The advisory committee can weigh in on conflicts of interest or consent to waiving an investment limitation, but it does not function as an investment or other governing committee.

Key Persons We all know real estate is a management business. Because fund investors have limited rights, they may seek to ensure the sponsor’s investment team remains in place by negotiating a key person provision. A typical key person provision will provide specific time and attention requirements for certain principals (or replacements approved by the advisory committee). The traditional remedy for

GP Removal Investors will typically require the right to remove the sponsor (or its affiliate) as a general partner of the fund in the event of “cause.” The definition of cause will be negotiated but typically includes fraud, gross negligence, willful misconduct, and material breach of the fund partnership agreement. A court determination may or may not be required for a finding of cause. The removal will not be automatic but usually will require a vote of at least a majority of the nonaffiliated fund investors. Consequences to the sponsor may include reducing the amount of promote payable to the general partner and automatic termination of any affiliate service agreements.

Given the high standard for demonstrating cause, investors may also seek the right to remove the general partner without cause but with a higher voting standard (supermajority or higher). If agreed, this removal would not typically result in a reduction to the promote (though in either case, if there is a removal, it seems unlikely that the fund is providing sufficient returns to generate a substantial promote).

Documentation of the Fund Offering Private Placement Memorandum The Private Placement Memorandum (PPM) is primarily a disclosure document for Securities Act compliance purposes. It typically includes a summary of the fund’s terms, investment strategy, the sponsor’s view of the market opportunity, background information about the sponsor, and track record information. The track record should be reviewed carefully by counsel to ensure compliance with SEC guidance. For example, the SEC has determined that sponsors must include net performance return calculations (i.e., net of fees and carry) with equal prominence to any gross performance return information. There are

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also rules relating to ownership of track record information that may be relevant to newly formed teams. The “legal” sections of the PPM include disclosure on risk factors and conflicts of interest, as well as disclosure around tax, ERISA, and other regulatory implications of the fund. Finally, the PPM must contain any required offering legends that may apply, depending on the jurisdictions in which the fund interests will be marketed and sold.

Limited Partnership Agreement The partnership agreement for the fund memorializes the relationship among the sponsor, as general partner, and the investors, as limited partners, and covers governance, economics, and exit and transfer provisions. Because most funds have a term of at least ten years, the document needs to provide clarity but also some degree of flexibility to allow for adjustment over time.

Subscription Agreement The subscription agreement documents the investor’s subscription for limited partner interests in the fund; it provides the contractual basis for the investor’s capital commitment. The subscription agreement also includes numerous representations, warranties, and covenants related to investor suitability and other information needed for securities law and regulatory compliance.

Regulation of the Fund Offering Process and Operations Although a real estate private equity fund is, by definition, designed to be exempt from registration under most US federal regulatory regimes, many regulatory requirements need to be addressed.

Securities Act of 1933 Most institutional real estate funds are offered by a private placement of interests under Rule 506(b) of Regulation D of Section 4(a)(2) of the Securities Act (Rule 506(c) permits general solicitation but requires the sponsor to take reasonable steps to verify the accredited investor status of the investors.) Compliance with Rule 506(b) provides a

safe harbor for exemption from registering the offering with the SEC, but there is a requirement to file a Form D with the SEC after closing a sale of interests in the fund. To comply with Reg D, the offering generally must be made only to “accredited investors” as defined by the SEC and done without general solicitation. The sponsor cannot advertise the offering, and offers may be made only to prospective investors with whom the sponsor has a pre-existing substantive relationship. (No cold-calling!) Rule 506 offerings are also subject to bad actor disqualification provisions relating to prior acts by certain covered persons in the sponsor organization. Private placements are also subject to general antifraud provisions, meaning the sponsor will have liability for false or misleading statements.

Investment Company Act Most funds are formed under an exemption to the Investment Company Act of 1940, which imposes significant registration and reporting requirements on “investment companies.” Two popular exemptions are Section 3(c)(1), which provides an exemption for privately-placed funds with no more than 100 beneficial owners (look-through rules apply), and Section 3(c)(7), which provides an exemption for privatelyplaced funds in which all investors qualify as “qualified purchasers” as defined by the SEC. Note there are certain exemptions to both the 100-person limit and the qualified purchaser requirement for certain “knowledgeable employees” of the sponsor.

An exemption under 3(c)(6) may be available to a fund that will acquire direct controlling interests in real estate.

Investment Advisers Act A fund’s sponsor or general partner may be required to register as an investment adviser under the Investment Advisers Act of 1940, which triggers reporting to the SEC. Registered investment advisers are also subject to additional requirements concerning the standard of care and performance-based compensation.

Registration is generally required when regulatory assets under management

exceed $100 million. Some sponsors can avoid registration by providing advice solely regarding real estate rather than securities, a conclusion requiring a very fact-specific analysis. Note that most states also have registration requirements for investment advisors that may apply in the absence of federal registration.

Anti-Money Laundering Although not unique to raising capital via a private fund, it is worth noting that the fund sponsor must comply with Anti-Money Laundering regulations concerning the offering.

Freedom of Information Act (FOIA) Public pension funds and public university foundations and endowments are some of the most common real estate private equity fund investors, and their investments are subject to FOIA and similar state disclosure laws. As a result, information about the fund’s investments may be made publicly available. Those disclosures may be limited contractually to provide some protection to the sponsor.

Employee Retirement Income Security Act Private pension funds are also common investors in real estate private equity funds, and those private pension funds are subject to the Employee Retirement Income Security Act of 1974 (ERISA). A fund sponsor will want to avoid the fund’s assets being deemed “plan assets” under ERISA, which would trigger certain fiduciary standards of conduct and prohibited transactions.

Most real estate funds find exemptions from ERISA by limiting their beneficial ownership to less than 25 percent ERISA plan investors or operating as a “venture capital operating company” or “real estate operating company.”

Conclusion Though the ready availability of discretionary capital makes the real estate fund appealing, it is typically more time-consuming and complicated to launch a real estate fund than to raise capital on a deal-by-deal basis. n

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September/October 2023 21

KEEPING CURRENT P R O B AT E CASES BEQUESTS: Gift of proceeds from sale of specific property is a specific bequest.

The decedent’s inter vivos trust made a series of general bequests of sums of money and then granted the decedent’s nieces and nephews a six-month option to purchase any real estate the decedent owned at death. Any property not purchased was to be sold and the proceeds divided among the nieces and nephews surviving the settlor and the children of those who predeceased. The nieces and nephews brought a declaratory judgment proceeding seeking a declaration that the provision created a specific bequest so that the sale proceeds would belong to them. The trustee and other beneficiaries opposed, contending that the provision was a demonstrative bequest and should be treated as a general bequest so that the proceeds of the sale would be available proportionately to all beneficiaries of general bequests. The trial court granted summary judgment to the defendants in the declaratory judgment proceeding, and on appeal the Illinois intermediate appellate court reversed in Bruno v. Knippen, No. 2-22-0164, 2023 WL 2155408 (Ill. App. Ct. Feb. 22, 2023), holding that the language created a specific bequest because it gave a fund to be created by the sale of identified real estate.

COMMON LAW MARRIAGE: Removal of impediment does not affect existing common law marriage. The District of Columbia Court of Appeals held in In re Estate of Jenkins, 290 A.3d 524 (D.C. 2023), that if a couple makes an express mutual agreement “in words of the present tense” to be married and the Keeping Current—Probate Editor: Prof.

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

Keeping Current—Probate offers a look at selected recent cases, tax rulings, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.

agreement is followed by cohabitation, even though there is a known or unknown legal impediment to the marriage at the time, removal of the impediment does not affect the agreement so long as the couple continues to cohabit.

EXECUTOR’S DUTY TO CREDITORS: An executor owes no duty to estate creditors. The Supreme Court of Texas in its opinion in Austin Trust Co. v.

Houren, 664 S.W.3d 35 (Tex. 2023), held that an independent executor does not owe fiduciary duties to the creditors of the estate. In this case, it meant that the validity of releases of the estate executed by beneficiaries of trusts created by the testator’s exercise of a power of appointment is judged under general contract law.

LIFE INSURANCE: Change of beneficiary accomplished through substantial compliance. The insured attempted to change the beneficiary of life insurance from the insured’s estranged spouse to their children by faxing the form the insurer provided showing the change of beneficiary in the insured’s handwriting but lacking the insured’s signature and date. The insurer sent a letter to the insured stating the form needed to be signed and dated, but there was no evidence that the insured received this letter.

The trial court issued a declaratory judgment in favor of the children, and, on appeal, the Arkansas Supreme Court affirmed in James v. Mounts, 660 S.W.3d 801 (Ark. 2023). The court held that by completing and returning the form and in light of the evidence that the insured had

not received the letter regarding the absence of a signature and date, the insured had substantially complied with the contractual requirements for changing the beneficiary.

MARRIAGE: Putative spouse rather than legal spouse has community property rights. The decedent’s first marriage was never dissolved, making the second marriage a nullity. Under Louisiana Civil Code art. 96, a null marriage produces “civil effects” in favor of a party contracting in good faith including the application of the community property regime. In Succession of Burns, 354 So. 3d 1197 (La. 2022), the Louisiana Supreme Court overruled precedent and held that a surviving putative spouse who acted in good faith is the sole surviving spouse for purposes of succession to community property.

POUR-OVER WILLS: Disinheritance in a will extends to the trust receiving the pour-over property. The decedent executed a pour-over will and revocable trust which, after receiving the pour-over, would terminate on the decedent’s death and be distributed outright to the decedent’s four children. The trust could be amended by “a signed writing.” Approximately 18 months later, the decedent executed a new will disinheriting one of the children. The decedent did not amend the trust to reflect the disinheritance. After the decedent’s death, the personal representative brought a declaratory judgment action seeking confirmation of the disinheritance. The court in IMO Amelia Noel Living Trust, No. 2020-1107-SEM, 2022 WL 3681269 (Del. Ch. Aug. 16, 2022), aff ’d, 293 A.3d 1000 (Del. 2023), held that the will amended the trust to effect the disinheritance; to hold otherwise would fail to carry out the decedent’s testamentary intent.

TRUSTEE REMOVAL: Trustee has standing to question dismissal. The beneficiaries’ first attempt to remove the trustee and the successor trustee was ineffective because it did not conform to the terms of

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the trust; the second attempt was successful. In Caputo v. Moulton, 204 N.E.3d 1009 (Mass. App. Ct. 2023), the court held that the trustee, but not the successor trustee, had standing to seek declaratory relief regarding the first dismissal because the trustee needed to know whether the trustee was the actual trustee for the period between the failed and the successful removal attempt. In addition, the question of the beneficiaries’ potential violation of the trust’s no-contest clause was of no import because the person to whom the forfeited property would have passed promised to distribute it to the beneficiaries in proportion to their interests in the trust.

TRUSTEES: The trustee did not act impartially in defending a trust amendment benefiting trustee’s children. The third and final amendment to the settlor’s inter vivos trust substituted the settlor’s sibling for two of the settlor’s children as successor trustee, changed the dispositive provisions on the settlor’s death to disproportionately benefit one child, and made pecuniary gifts to the successor trustee’s two children. After the settlor’s death, litigation between the two children over the validity of the amendment ended with both children agreeing it was not properly executed. The court appointed a private fiduciary as the successor trustee. One of the children then compelled the settlor’s sibling to account as successor trustee and the trial court surcharged the trustee the full amount of the trust assets paid for attorney fees. The appellate court affirmed in Zahnleuter v. Mueller, 305 Cal. Rptr. 3d 474 (Cal. Ct. App. 2023), holding that the trustee did not act impartially in defending an amendment that changed the trust’s dispositive provisions to benefit the trustee’s children.

WILLS: Lost will admitted to probate although no proof of the will’s fate. The nominated executor offered for probate a copy of the decedent’s will. The trial court admitted the will to probate and the objectants appealed, arguing that the court erred in holding that the presumption of revocation that arises when a will last known to be in possession of the testator cannot be found after death cannot be overcome where the proponent offers multiple theories of the will’s location. The Virginia intermediate

appellate court affirmed in Glynn v. Kenney, 884 S.E.2d 259 (Va. Ct. App. 2023), holding that because under Virginia case law the proponent of a lost will need not prove what happened to the will, lack of proof of the will’s fate does not prevent the proponent from overcoming the presumption of revocation by clear and convincing evidence.

TAX CASES, RULINGS, AND REGULATIONS ESTATE TAX: Transferee liability for unpaid estate taxes can be triggered when a beneficiary receives property from a trust after the date of death. The taxpayer died with an estate of almost $200 million; an inter vivos trust held the majority of those assets. The IRS audited the estate tax return and asserted a deficiency which the estate agreed to pay through I.R.C. § 6166 installment payments. Eventually, the estate quit paying the installment payments and declared the trust depleted. When more than $10 million in estate taxes remained unpaid, the United States sued several of his heirs for transferee liability under I.R.C. § 6324(a)(2). The Ninth Circuit in United States v. Paulson, 68 F. 4th 528 (9th Cir. 2023), reversed the district court and held the heirs were responsible for the estate tax through transferee liability. The court rejected the heirs’ argument that personal liability for unpaid estate taxes is imposed only on those who receive or have property included in the gross estate on the date of the decedent’s death; the argument would exclude those who receive property from the estate at any point after the date of the decedent’s death. The court held that I.R.C. § 6324(a)(2) imposes personal liability for unpaid estate taxes on those who receive estate property anytime after the decedent’s death as long as it is within the applicable statute of limitations.

TAX RETURN: Appellate court affirms numerous charges stemming from fraud and tax evasion. The taxpayer had ongoing issues with the IRS for over a decade.

He stopped filing personal returns despite receiving a W-2. He later purchased luxury vehicles using the refunds from fraudulently filed Form 1041s, but the

government seized them. The Eighth Circuit in United States v. Kock, 66 F.4th 695 (8th Cir. 2023), upheld his convictions for failure to file a tax return, making false claims against the United States, and wire fraud, stating that there was sufficient evidence that the taxpayer knew the returns were false and that he had an intent to deceive the IRS. For example, the taxpayer told the car salesman handling the purchase of the vehicles that he was using money from the sale of a business to purchase the cars. The court also rejected the taxpayer’s defense that the IRS should have acted with greater diligence and caught the scheme.

LITERATURE ASSISTED REPRODUCTIVE TECHNOLOGY: In When a Frozen Egg or Pre-embryo Is Negligently Lost or Destroyed, 111 Ill. B. J. 4 (2023), Whitney Barr explores how courts are grappling with the complex issues surrounding the treatment of biological material with the potential for life and what possible remedies are available for individuals whose eggs or embryos have been destroyed due to negligence. As the assisted reproductive industry grows, the law must evolve to address egg freezing and negligence liability.

BAHÁ’Í ESTATE PLANNING: Martin Shenkman provides specific examples of how estate planners can tailor an estate plan for clients of the Bahá’í Faith in Estate Planning for Bahá’í Clients, 50 Est. Plan. 04 (2023).

CONDITIONAL GIFTS: In A Will and a Way to Discriminate?, 111 Ill. B. J. 5 (2023), Christian Ketter argues that the Illinois case of In re Feinberg, which enforced a will provision conditioning a gift on the beneficiary marrying within a specified religious faith, places courts in a “constitutionally untenable position” because it forces courts to allow “discrimination of a protected class and effect disinheritance of a potential beneficiary on that basis.”

DIRECTED AND DIVIDED TRUSTS: In Tax Considerations in Designing and Administering Directed Trusts and Divided Trusts, 50 Est. Plan. 11 (2023), Brad Dillon and Todd Mayo consider the tax implications when designing and administering directed

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KEEPING CURRENT P R O B AT E

trusts and divided trusts. For example, the change in trust officials, such as appointment, resignation, or changes in domicile or relationship with the settlor, can have significant tax consequences, including gift, estate, generation-skipping transfer, and state income taxes.

DIRECTED TRUSTS: In Who’s the Boss?

Fiduciary Liability and Directed Trusts, 57 Real Prop., Tr. & Est. J. 3 (2022), Timothy Ferges, Melisa Dibble, Adam Ansari, and Daniel Ebner explain how directed trusts are becoming increasingly common and the lack of uniform fiduciary standards among the states causes uncertainty about liability. This uncertainty includes questions about the “fiduciary duty of trust directors towards beneficiaries, the potential absolution of trustee’s liability if a nonfiduciary trust director is involved, and whether a trust can be structured to avoid fiduciary accountability altogether.”

Courts will likely address these uncertainties in the future, but practitioners must consider potential drafting issues when advising their clients on directed trusts.

DYNASTY TRUSTS: In A New Feudalism: Selfish Genes, Great Wealth, and the Rise of the Dynastic Family Trust (DFT), 55 Conn. L. Rev. 19 (2022), Eric Kades warns how repealing the Rule Against Perpetuities in most of the United States will exacerbate inequality as the ultra-wealthy use DFTs to ensure socioeconomic privilege for their descendants forever. Kades argues that this situation severely threatens American values and proposes a simple solution: preserving the Rule Against Perpetuities.

ESG INVESTING: In Fiduciary ESG Investing: Navigating the New Frontier, 57 Real Prop., Tr. & Est. J. 3 (2022), Jennifer Goode and Andrea Kushner suggest that a fiduciary of a trust, private retirement plan, or charitable nonprofit should not avoid environmentally, socially, and governance-related investments but should instead approach ESG strategies with the same thoughtful analysis as any other investment approach. If the ESG strategy does not sacrifice the beneficiaries’ overall return and is part of a well-diversified portfolio with reasonable risk and return

attributes, it will likely fulfill the fiduciary’s duties of loyalty and care.

FOREIGN ASSET PROTECTION TRUSTS: In Why Foreign Asset Protection Trusts are Ultimately More Protective Than Domestic Asset Protection Trusts, 50 Est. Plan. 20 (2023), Eric Kaplan explains the many benefits associated with asset protection trusts and suggests creating a foreign APT for enhanced protection for four main reasons: “(1) the increased ability of the settlor to retain benefit and control; (2) the foreign APT is less likely to be an automatic target in litigation against the settlor; (3) the foreign element will likely impact a creditor’s decision on pursuing assets; and (4) the foreign element is ultimately more protective.”

FUNERALS: In Going Beyond the Grave: A Defense of a Right to a Funeral, 15 Wash.

Univ. Juris. Rev. 335, Michael Morris highlights the existence of Hart Island, the largest mass grave in the United States, where over a million marginalized individuals have been buried without individual grave markers or funerals. He argues for the recognition of a right to a funeral, emphasizing the importance of community and dignity in the burial process, and discusses legislative proposals to address this issue.

GUARDIANSHIPS: In Guardianships vs. Special Needs Trusts and Other Protective Arrangements: Ensuring Judicial Accountability and Beneficiary Autonomy, 72 Syracuse L. Rev. 423 (2022), A. Johns, Robert Dinerstein, and Patricia Dudek acknowledge the complexity of decision-making for individuals with disabilities or older adults when it involves formal arrangements like guardianships and trusts. The authors aim to simplify these options and to provide the necessary support for individuals to thrive while maintaining as much autonomy as possible.

IRREVOCABLE TRUST MODIFICATION: In Federal Transfer Taxes and the Protean Irrevocable Trust, 85 Alb. L. Rev. 1 (2022), Kent Schenkel questions the expanding practice of allowing donors to modify even an irrevocable trust based on post-transfer events. Schenkel argues that

this ability exacerbates wealth inequality and undermines democratic institutions. Instead, he suggests imposing transfer tax penalties on certain trust modifications to address these issues.

MEDIATION & ARBITRATION PROVISIONS: In Consideration of Mediation and Arbitration Provisions in Wills and Trusts, 92 Kan. B.J. 26 (2023), Tim O’Sullivan and Wyatt Hoch explore the use of alternative dispute resolution, such as mediation and arbitration, in estate planning and trust disputes in the United States. They examine the historical context of ADR, its increasing popularity, and the enforceability of mandatory ADR provisions in wills and trusts.

MODERNIZATION OF WILLS LAW: In Incremental Change in Wills Adjudication, 49 Fla. St. Univ. L. Rev. 883 (2022), Mark Glover explores how many states have incorporated incremental changes instead of the UPC’s comprehensive reform in the context of wills adjudication. With variation in what states choose to modify, Glover aims to analyze the different state approaches to help guide policymakers in implementing their desired changes.

NIL FOR STUDENT ATHLETES: In The Tax Impact and Planning Opportunities of the NIL Rules on Student-Athletes, 50 Est. Plan. 20 (2023), W. Dowis, R. Harris, and Gloria Stuart discuss the new name, image, and likeness law changes for student-athletes and the importance of managing this unique opportunity to help a student-athlete achieve financial success.

POWER OF ATTORNEY: In It’s Not OK, Boomer: Preventing Financial Power-of-Attorney Abuse of Elders, 82 Md. L. Rev. 181 (2023), Genevieve Mann argues that the current approach of leaving a power of attorney unregulated leaves elders at extreme risk of abuse. Instead, she proposes a comprehensive solution that includes agent supervision and a centralized power-of-attorney registry to detect and prevent abuse without excessively burdening agents or elders.

RULE AGAINST PERPETUITIES: In Perpetuities in an Unequal Age, 177 Nw. Univ. L. Rev. 1477 (2023), Jack Whiteley argues that complexity and the lack of understanding among lawyers and the public was a central reason behind the elimination of the

Published in Probate & Property, Volume 37, No 5 © 2023 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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KEEPING CURRENT P R O B AT E

Rule Against Perpetuities. This complexity allowed financial industries successfully to advocate for removing the Rule, despite its intended purpose of preventing dynastic wealth and increasing the economic inequality in our country. He highlights the Rule as a lesson of how the complexity of inheritance law can have negative consequences if not well understood by the public.

SLAYER RULE: In The Slayer Rule: An Empirical Examination, 48 ACTEC L.J. 201 (2023), Fredrick Vars provides the first empirical study to analyze the slayer rule’s critical assumptions. For example, the study suggests that the slayer rule should not apply to assisted suicide, self-defense, or killings due to mental illness. Survey respondents, however, want to see the slayer rule include circumstances like elder abuse and neglect.

Additionally, the study supports converting the slayer rule from a mandatory law to a default rule that individuals can opt out of in their wills. These findings highlight the need for reform to align public opinion with current legislation.

STATE ESTATE TAX: In Death by Deduction: Section 2508 and the Decline of State Death Taxes, 48 ACTEC L.J. 103 (2023), Jeffrey Cooper explores why the § 2058 deduction has had minimal influence on shaping estate tax policies. He examines the factors contributing to this limited impact, analyzes how states responded to the implementation of § 2058, and highlights the potential benefits of modifying certain aspects of estate tax laws to maximize benefits available under § 2058.

TRANSFER ON DEATH DEEDS: In his Note, It Sure Can Get Cold in Des Moines: Why the Iowa Legislature has Remained Frozen on Transfer on Death Deeds for Real Property, 108 Iowa L. Rev. 901 (2023), Mark Hart explains how the Iowa legislature has repeatedly failed to pass the Real Property Transfer on Death Act, preventing Iowans from transferring real property outside of probate upon death. Hart compares how neighboring states implemented similar legislation and advocates for Iowa to do the same.

TRUST MODIFICATION: In Trust Alteration and the Dead Hand Paradox, 48 ACTEC L.J. 147 (2023), Jeffrey Pennell and Reid

Weisbord explore how the repeal of the Rule Against Perpetuities and the expanding ability for fiduciaries to modify trusts, has led to an increase in the concentration of private wealth and the rise of perpetual trusts as an effective tool for dynastic estate planning. This intergenerational wealth transmission plays a role in wealth inequality, and trust alteration rules will only amplify this effect.

WILLS FOR HEROES: In Wills for Heroes Provides First Responders with Estate Planning Documents, 25 Lawyers J. 1 (2023), Joanne Parise explains how volunteer attorneys, witnesses, and notaries provided their services for a Wills for Heroes event at the Penn Hills No. 7 Volunteer Fire Department on March 25, 2023. Within six hours, they provided nearly 30 first responders and their families with fully executed estate planning documents.

LEGISLATION ARIZONA permits remote witnessing of electronic wills provided the witness is physically in the United States and requires electronic wills to be readable as text. 2023 Ariz. Legis. Serv. Ch. 32.

ARKANSAS adopts the Uniform Community Property Disposition at Death Act. 2023 Ark. Laws Act 582.

ARKANSAS allows for the decanting of trusts. 2023 Ark. Laws Act 293.

ARKANSAS authorizes domestic asset protection trusts. 2023 Ark. Laws Act 291.

ARKANSAS increased Rule Against Perpetuities time period from 90 to 365 years after the interest’s creation. 2023 Ark. Laws Act 719.

COLORADO adopts the Uniform Community Property Disposition at Death Act. 2023 Colo. Legis. Serv. Ch. 30.

IDAHO enacts Uniform Electronic Wills Act. 2023 Idaho Laws Ch. 104.

IDAHO modernizes law relating to advance directives. 2023 Idaho Laws Ch. 307.

INDIANA authorizes pre-mortem probate.

2023 Ind. Legis. Serv. P.L. 38-2023.

KANSAS adopts the Uniform Trust Decanting Act. 2023 Kan. Laws Ch. 48.

KANSAS passes the Donor Intent Protection Act to provide remedies if a charitable donee does not follow the donor’s restrictions on the use of the donation. 2023 Kan. Laws Ch. 45.

MARYLAND allows non-spouses to register as a domestic partnership and obtain specified benefits of marriage. 2023 Md. Laws Ch. 647.

MARYLAND enacts the Maryland Trust Decanting Act. 2023 Md. Laws Ch. 715.

MARYLAND establishes the Affordable Life, Wills, and Estate Planning for Seniors Grant Program within the Maryland Legal Services Corporation to provide grants to fund estate planning services for eligible seniors. 2023 Md. Laws Ch. 776.

MINNESOTA passes the Uniform Electronic Wills Act. 2023 Minn. Sess. Law Serv. Ch. 21.

NEVADA prohibits discrimination against a living organ donor in a policy or contract of life insurance, life annuity, or health insurance. 2023 Nev. Laws Ch. 6.

NORTH DAKOTA authorizes remote notarization. 2023 N.D. Laws H.B. 1083.

TENNESSEE passes The Small Estate Probate Act to provide a simple procedure to probate estates valued at $50,000 or less. 2023 Tenn. Laws Pub. Ch. 297.

WASHINGTON adopts the Uniform Partition of Heirs Property Act. 2023 Wash.

Legis. Serv. Ch. 6.

WYOMING establishes a procedure whereby individuals can register their digital assets with the secretary of state. 2023 Wyo. Laws Ch. 174.

WYOMING permits will witnesses to be remote. 2023 Wyo. Laws Ch. 170. n

Published in Probate & Property, Volume 37, No 5 © 2023 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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Biden’s 2024 Green Book Tax Proposals What “Fair Share” Taxation Means for Estate Planning

By James I. Dougherty and Marissa Dungey

James I. Dougherty and Marissa Dungey are partners and co-founders of Dungey Dougherty PLLC in Greenwich, Connecticut.

This article is adapted from the authors’ article “Biden’s 2023 Green Book Proposal,” initially published by Wealthmanagement. com on March 15, 2023.

client questions prompted by the headlines on the proposed increased taxes on high-net-worth (HNW) individuals.

President Biden’s third set of tax proposals builds on his first two. His first Green Book’s headliner for estate planners was a proposal to make death, lifetime giving, and exceeding maximum holding periods for assets in trust recognition events for income tax purposes. His second Green Book contained far more proposals, with much of the attention given to a new proposal to impose a minimum tax on those worth over $100 million, which the Biden administration nicknamed the misnomer the “Billionaire Minimum Income Tax,” despite the markedly lower threshold. Last year’s proposals also gave new life to proposals from the Obama administration that affected estate planning strategies, such as changes to grantor trusts and ending perpetually GST tax-exempt trusts. The 2024 Green Book continues to build

upon the prior proposals and adds further targeted attacks on common estate planning techniques for HNW individuals. The following is a summary of the key provisions affecting trust and estate planning.

“Fair Share” Getting Bigger This year’s proposed budget from the administration calls for trillions of new government spending and lowering the deficit by trillions, which necessarily translates to substantially more revenue in the form of taxes. The President states in his budget message that “[w]e more than fully pay for these investments in our future by asking the wealthy and big corporations to pay their fair share.” Budget of the U.S. Government Fiscal Year 2024, Office of Management and Budget, The Budget Message of the President, p. 2 (March 2023), https://tinyurl.com/4sk3m58u.

To the Biden administration, “fair”

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Getty Images

O

n March 9, 2023, the Biden administration released its proposed budget calling for an increase of trillions in federal spending along with his proposed offsetting revenue raisers in General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals (2024 Green Book). Department of the Treasury, Green Book (March 2023), https:// tinyurl.com/5je37vvz. These tax proposals are his third since taking office and first since Republicans took control of the House of Representatives.

Given the divided Congress, the chance of many or even any of these proposals becoming law now appears remote.

Tax practitioners need to understand the proposals, however, to address

ostensibly means substantially higher taxes to a small group of taxpayers.

The one that will gain much attention again is the “billionaire minimum tax,” which is a tax imposed by virtue of wealth but isn’t a wealth tax. Instead, it sets a minimum tax rate on income, gains, and unrealized gains of individuals with more than $100 million (not a billion). The mechanics of this year’s proposal remain essentially the same, including a provision phasing in the tax for those over $100 million but under $200 million, having the tax imposed on unrealized gain be available as a credit when the asset is sold, and allowing for installment payments. The most noticeable change is that this year’s proposal calls for a 25 percent tax rate, up from last year’s 20 percent.

Gratuitous transfers would also become taxable events under the 2024 Green Book. In the Biden administration’s first Green Book, the proposal that garnered the most attention from estate planners was making death, lifetime gifts, and exceeding maximum holding periods for assets in trust recognition events for income tax purposes. The income tax liability would be in addition to the potential transfer taxes. Last year’s proposal, which had made some taxpayer-friendly changes from the original proposal, returns to the 2024 Green Book substantively the same. A per donor-decedent $5 million exclusion on the gain is portable to a surviving spouse. This exclusion will remove many taxpayers from the application of this new double taxation system, but HNW individuals will remain affected.

The 2024 Green Book also brings new proposed taxes targeted at HNW individuals. Changes have been

suggested to the net investment income tax (NIT) to mirror changes for Medicare tax. Specifically, the tax rate for the NIT would be raised by 1.2 percent for taxpayers with more than $400,000 of income (going from 3.8 percent to 5 percent), and the Medicare tax would also be increased by 1.2 percent for those with earnings over $400,000.

A related proposal is to expand what income is subject to the new investment income tax by closing the loophole that has previously protected income from certain pass-through entities.

Other notable income tax hikes for HNW individuals proposed by the Biden administration in each of its Green Books include increasing the top marginal rate for ordinary income to 39.6 percent for single taxpayers earning more than $400,000 and married taxpayers filing jointly with income above $450,000. There also remains a proposal to tax long-term capital gains and qualified dividends at ordinary income tax rates, which, when taken together with other changes, would result in a tax rate of 44.6 percent for taxpayers with more than $1 million of income.

Grantor Trusts The grantor trust rules have lent themselves to effective transfer tax planning by allowing transactions between the grantor and the grantor trust to be generally disregarded for income tax purposes and the grantor’s estate to be depleted by obligating the grantor to cover the tax liabilities attributable to the grantor trust’s earnings. Because of the rules’ effectiveness, Democrats have proposed various changes that would disincentivize their use as a transfer tax planning tool.

Under President Biden’s proposal

this year, which is the same as the proposal he introduced last year, income tax payments required to be made by the grantor under the grantor trust rules would be treated as taxable gifts to the trust in the future. The value of the gift will be determined as of December 31 of each year, where the gift will be the sum of all income taxes paid, less any reimbursements made to the grantor by the trust. A technical addition to this year’s proposal is a sentence clarifying that the gift cannot be reduced by the marital deduction, charitable deduction, or various gift exclusions under Sections 2503(b) and 2503(e).

The proposal explicitly excludes revocable trusts from this regime. In addition, the proposal would treat transfers of an asset for consideration between a grantor and a grantor trust to be regarded for income tax purposes, thereby making sales and payments in satisfaction of an obligation recognition events triggering a capital gain (losses would be disallowed).

GRATs and CLATs The 2024 Green Book targets two vehicles commonly used in transfer tax planning—grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs). The proposal on GRATs is the same proposal that appeared in last year’s Green Book and was previously proposed in the Obama administration’s final two Green Books.

The proposal would eliminate shortterm GRATs and so-called “zeroed-out” GRATs, where the value of the grantor’s retained annuity interest equals the value of the property transferred, resulting in a taxable gift at or near zero. To qualify, the proposal requires a GRAT (1) to have a term of at least ten years, (2) last no longer than the life expectancy of the grantor plus ten years, and (3) to have a remainder interest (that is,

Published in Probate & Property, Volume 37, No 5 © 2023 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.

September/OctOber 2023

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The Green Book targets loans to beneficiaries used to avoid the income and GST tax consequences of distribution.

the amount of the taxable gift) to be at least the greater of (a) 25 percent of the value of the assets contributed or (b) $500,000 (not to exceed the value of the gift).

The proposal on CLATs is new. A CLAT is a trust in which an annuity is paid to charity for a term of years and, at the end of the term, any remaining property in the trust passes to a noncharitable beneficiary. As with a GRAT, only the present value of the remainder interest is subject to gift tax, which means that under current law, the trust can be structured so the remainder interest is valued at or near zero (a socalled “zeroed-out CLAT”). As a result, appreciation in excess of the present value calculation passes gift or estate tax-free with a corresponding 100 percent charitable deduction. More transfer tax benefits can be achieved by deferring the amounts that need to be paid to charity by starting with a smaller annuity in the first year that increases yearly. Unlike a GRAT, a CLAT is not limited to a 20 percent increase each year, leading to a technique commonly referred to as a “shark fin CLAT,” which derives its name from the shape of the exponential increase in the annuity percentage over the life of the CLAT. The 2024 Green Book would end the use of zeroed-out CLATs by requiring the non-charitable remainder interest to be at least ten percent of the value of the property used to fund the trust. Further, annuity payments would need to be a level, fixed amount over the term of the CLAT.

Ending the Perpetually GST Exempt Trust By effectively using a taxpayer’s generation-skipping transfer (GST) exemption to transfer assets to a trust that can exist in perpetuity (or at least several centuries), it is possible to shield assets from the imposition of transfer taxes indefinitely. Various proposals from Democrats over the years have called for these GST-exempt dynastic trusts to become non-exempt after a period of years. The 2024 Green Book carries over a proposal the Biden administration introduced under which the GST exemption would apply only to the (i) distributions to beneficiaries who are no more than two generations below the transferor or those who are assigned to a younger generation but were alive when the trust was created and (ii) a trust on the death of the last in a generation (i.e., a taxable termination) for as long as one of the aforementioned beneficiaries is living. The proposed change would apply to both pre-enactment and post-enactment trusts. Pre-enactment trusts would be treated as having been created on the enactment date in identifying which beneficiaries are alive, and the transferor would be deemed to be in the generation immediately above the oldest generation alive at the time of enactment.

This year’s proposal adds two additional proposals to limit techniques to mitigate or defer the imposition of a GST tax liability. The first of these new proposals targets sales between trusts. If a GST-exempt trust purchases

property subject to the GST tax, the proposal would require a redetermination of the purchasing trust’s inclusion ratio. The value of the purchased assets would be added to the denominator of the fraction, with only the amount of that property that was exempt from GST taxes before the purchase added to the denominator. This proposal would apply to all post-enactment transactions.

The second proposal targets the inclusion of charitable beneficiaries as a mechanism to avoid GST taxes. The perceived abuse, as described in the 2024 Green Book, is that charities are being included by taxpayers as beneficiaries of non-GST exempt trusts solely or primarily because they aren’t skip persons for GST tax purposes, thereby avoiding a taxable termination event on the death of the last non-skip person to die. The 2024 Green Book states this is being done “even though that organization may be unlikely ever to receive a distribution.” The proposal would ignore any charitable interest for GST tax purposes for all taxable years after enactment, thereby causing taxable terminations for trusts relying on the charitable interests as the only nonskip beneficiary of a trust. Notably, the Treasury Regulations already contain an anti-abuse provision that disregards any interest if used primarily to postpone or avoid the GST tax, so this proposal is more likely to affect trusts in which a charity has a substantive interest. Treasury Regulation § 26.2612-1(e) (2)(ii).

Trust Loans Using loans for estate planning can be advantageous, especially when interest rates are low. The Green Book targets loans to beneficiaries used to avoid the income and GST tax consequences of distribution. It suggests the loans are often forgiven or otherwise not paid back, which is difficult for the IRS to track. The perceived loss of federal income tax revenue likely refers to the uncompensated use of trust property by a beneficiary, such as with a belowmarket loan, but also to the use of real or tangible property owned by the trust.

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For GST tax purposes, a loan to a beneficiary who is a skip person from a non-GST-exempt trust would avoid GST tax on a taxable distribution unless and until the note is forgiven. Further, grantors in need of liquidity may take a loan from the trust, which doesn’t reduce the value of the trust, and the loan may be taken as a deduction on the grantor’s estate tax return to the extent it hasn’t been repaid.

The 2024 Green Book proposes to treat loans to and use of trust property by a trust beneficiary as a distribution for income tax purposes, resulting in distributable net income carrying out to the borrowing beneficiary. This proposal is similar to Section 643(i), which applies to certain loans to, and the uncompensated use of trust property by, a US person from a foreign trust.

Further, it will also be treated as a distribution for GST tax purposes, meaning that if a beneficiary is a skip person and a loan is taken from a non-exempt trust, GST taxes would be imposed (though a refund would be available if the beneficiary repaid the loan). The proposal will give regulatory authority to the Treasury Department to identify transfers that would be excluded, such as shortterm loans and a beneficiary’s use of real or tangible property for a minimal number of days.

The 2024 Green Book proposes a special rule for GST tax purposes to discourage the grantor of a grantor trust from taking a loan. If the grantor or the grantor’s spouse takes a loan from a grantor trust, the amount repaid will be treated as an additional contribution to the trust upon repayment. As a result, it would use the borrower’s GST exemption to the extent the borrower still has any exemption. Without a remaining exemption, transfers to a trust that would constitute an indirect skip would increase the trust’s exclusion ratio or a direct skip would trigger GST taxes.

Notably, this could create a planning opportunity for a non-GST exemption if the grantor’s spouse has a GST exemption remaining.

Capping Annual Exclusion Gifts President Biden hasn’t proposed

lowering the estate tax exemption while in office, but the 2024 Green Book proposes limiting how much a taxpayer can transfer using the annual exclusion under Section 2503(b). Under current law, a taxpayer may exclude from taxable gifts the first $17,000 in transfers of a present interest in property per donee each year. Since the creation of the gift tax in 1932, there has been an amount that can be excluded per donee. The legislative intent behind the annual exclusion was “to obviate the necessity of keeping an account of and reporting numerous small gifts, and… to fix the amount sufficiently large to cover in most cases wedding and Christmas gifts and occasional gifts of relatively small amounts.” S. Rep. No. 665, 72d Cong., 1st Sess. (1932).

Despite the intent of the statutory language, it has been used as a wealth transfer vehicle to transfer substantial amounts free of gift tax. This includes funding irrevocable life insurance trusts (ILITs) with the use of Crummey powers and making transfers of partial interests in closely-held entities in which the donee has minimal rights to the enjoyment of the property, effectively giving the donor a level of retained control.

The Clinton and Obama administrations each proposed to curb annual exclusions as a transfer tax savings tool.

The 2024 Green Book brings back the proposal advanced during the Obama administration. Under this proposal, the requirement that a donee receive a

present interest in property to qualify for the annual exclusion is eliminated.

Instead, a new category of transfers would be created for any transfer to a trust (except Section 2646(c)(2) trusts) and transfers of an interest in a passthrough entity, a partial interest in property, and “other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by the donee.” There would be a $50,000 limit on transfers to this new category that could qualify for the annual exclusion. In effect, the annual exclusion per donee limit would continue to apply.

But the government would no longer need to scrutinize whether the donee’s rights in a trust or entity are sufficient to constitute a present interest in the property, and the amount that can be transferred to, or consisting of, such planning vehicles would be curbed.

To illustrate an example of how this proposal would affect an ILIT trust: take the case of an ILIT that gives the grantor’s ten descendants a Crummey power to withdraw up to the annual exclusion amount. Under current law, if the grantor transfers $170,000 to the trust in 2023, all funds are excluded from taxable gifts under Section 2503(b) ($17,000 multiplied by ten donees). If the 2024 Green Book proposal were to become law next year and $170,000 were transferred to the trust, only $50,000 would be excluded, and there would be a taxable gift of $120,000.

This result could cause substantial

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September/October 2023 29

Under this proposal, discounts would be curbed for minority interests by making the value for transfer tax purposes the pro-rata share of the fair market value for the property collectively owned by the family.

issues for existing ILITs that rely on annual exclusion transfers for large policy premiums. The donor would still be able to make outright gifts to any one or more of the ten donees of the difference, which, using this example, would be $12,000 per donee.

Valuation Clauses and Discounts The estate, gift, and GST tax regimes (collectively “transfer taxes”) are taxes computed on the fair market value of the property transferred. Given the importance of property valuation, certain valuation and planning techniques have come under fire by the IRS. The 2024 Green Book contains three proposals related to valuations for transfer tax purposes.

To ensure a desired transfer tax outcome, estate planners have employed what is referred to as a “defined value formula clause,” in which the amount transferred in a gift or bequest is based on a value as finally determined for transfer tax purposes. Formula clauses have long been used and accepted as part of testamentary estate planning.

For example, a credit shelter trust is funded with the greatest amount possible without exceeding the decedent’s remaining exemption, with the balance passing to a beneficiary that qualifies for the marital or charitable deduction.

Similar approaches have been taken during lifetime gifting, especially concerning hard-to-value assets, where the nature of the property transferred doesn’t define the gift but instead the

gift is defined by a set dollar amount’s worth of such property as determined for gift tax purposes, including adjustments on audit. Such clauses have gained acceptance by the courts over the years, most notably in Estate of Wandry v. Comm’r, T.C. Memo 2012-88 (March 26, 2012).

The government has consistently challenged the use of these defined valuation formula clauses on various policy grounds. Audits would be disincentivized because no tax liability would result from adjustments, incentivizing the undervaluation of property by taxpayers (implying there’s no downside risk to the taxpayer), and creating ambiguity in the actual ownership of the property at the time of the transfer given the potential for adjustments.

But these policy arguments have been unpersuasive to the courts, with the Ninth Circuit Court of Appeals even inviting the government to amend the Treasury Regulations if it disagreed with judicial acceptance of such clauses.

Estate of Petter v. Comm’r, 653 F.3d 1012 (9th Cir. 2011). During the later years of the Obama Administration, the Treasury Department did add a regulatory project to its Priority Guidance Plan on the subject, but the project was dropped after President Trump took office and hasn’t made a return. The 2024 Green Book proposes that, starting next year, “if a gift or bequest uses a defined value formula clause that determines value based on the result of involvement of the IRS, then the value of such gift or

bequest will be deemed to be the value as reported on the corresponding gift or estate tax return.” The proposal includes only two exceptions for when a defined value clause will be allowed for transfer tax purposes—first, if the value is to be determined by someone other than the IRS (such as an appraiser) within a reasonably short time after the date of transfer, and second if the clause is being used for estate tax purposes to define a “marital or exemption equivalent bequest.”

The second proposal seeks to disallow valuation discounts for transferring certain closely-held entities. As property valuation is based on a fair market value standard, the value of a transfer in partial or fractional interests in property isn’t necessarily the proportionate value of the underlying property. Instead, it considers factors hypothetical buyers and sellers would consider, such as discounts for lack of control and marketability. The 2024 Green Book proposal provides a synopsis of the government’s concern about a transfer of a partial or fractional interest as it “offers opportunities for tax avoidance when those interests are transferred intrafamily… they are not appropriate when families are acting in concert to maximize their economic benefits… artificially reducing the amount of transfer tax due.” The IRS proposed regulations under Section 2704 in 2016 to address its concern, but the proposed rules were ultimately withdrawn. The 2024 Green Book proposal would amend Section 2704(b) to apply a new valuation rule to any intrafamily transfers in which the family collectively owns 25 percent or more of the transferred property. Under this proposal, discounts would be curbed for minority interests by making the value for transfer tax purposes the pro-rata share of the fair market value for the property collectively owned by the family. Discounts still could be applied to the family’s collective interest, if appropriate, but only to the extent attributable to a trade or business. Passive assets (i.e., assets not actively used in a trade or business), even if held in a trust or business, would be segregated

Published in Probate & Property, Volume 37, No 5 © 2023 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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and valued as if held directly by a sole individual.

The final proposal is a carryover from last year’s Green Book addressing the valuation of certain promissory notes. The specific type of transaction of concern that gave rise to the proposal is one in which a taxpayer provides assets to a related party (such as a family member but more often a trust for the benefit of a family member) in exchange for a promissory note that has the minimum interest rate required for the loan not to be treated as a below-market loan under the Tax Code. The promissory note is valued at face value for gift tax purposes, meaning the transfer isn’t treated as a gift.

When that promissory note is later gifted or included in a decedent’s gross estate, some taxpayers assume that the fair market value is worth less than the face value, given various factors such as a low interest rate or lack of security. The Biden administration proposal states that if the promissory note was initially treated as having a sufficient interest rate to avoid having any forgone interest treated as income or any part of the transaction treated as a gift, then, for valuation purposes, the interest rate from the loan will be the greater of (1) the stated interest rate in the promissory note or (2) the applicable IRS published rate at the date of valuation. In addition, the loan would be assumed to be short-term to avoid the application of discounts. This attempt to bring consistency of valuation standards related to promissory notes was previously raised for regulatory action in prior versions of the Treasury Department’s Priority Guidance Plan before a statutory change was first proposed in last year’s Green Book.

Increased Reporting for Trusts Last year’s Green Book introduced a provision requiring many trusts to report additional information on their tax returns. This proposal returns this year, requiring all trusts (domestic and foreign if administered in the United States) with an estimated value over $300,000 at the end of a taxable year or $10,000 of income (in each case,

indexed for inflation) to report information about its grantor, trustees, and “general information with regard to the nature and estimated total value of the trust’s assets as the Secretary may prescribe.” Given the broad delegation to the IRS, no one can be certain how burdensome the reporting would be pending regulatory action. Regardless, with such low thresholds of value and income that would trigger the reporting obligation, this will be painful for all trusts and potentially cost-prohibitive for some.

This year’s proposal adds GST tax reporting obligations on the annual fiduciary income tax return. Under the new provisions of this proposal, a return would need to report the GST inclusion ratio at the time of any distribution to a non-skip person. Further, the return must report any trust modification or transaction with another trust during the year. The proposal states that this will provide the IRS “with current information necessary to verify the GST effect of any trust contribution or distribution.” This proposed reporting would likely require greater participation by the attorney in preparing the fiduciary income tax return.

Other Changes Three other proposals carried forward from last year that estate planners might find interest in and aren’t going to capture any headlines. One proposal would expand the application of the definition of “executor” under IRC Section 2203. Section 2203 applies when there is no fiduciary appointed and acting in the United States, in which case any person in actual or constructive possession of property in the decedent’s gross estate will be treated as the executor for estate tax purposes.

The limitation to only estate taxes can be problematic, as it doesn’t allow a party to represent the estate regarding income taxes, gift taxes, and other filing obligations without a courtappointed fiduciary. The provision also can be confusing in practice, as multiple people could be an executor under Section 2203 by virtue of possessing even trivial amounts of the decedent’s

property. Like last year, the 2024 Green Book proposes that the definition of “executor” apply for all taxes and would grant the Treasury Department regulatory authority to establish a priority order when multiple parties meet the definition.

The second proposal would extend the special estate tax lien under Section 6324 to continue during any deferral or installment payment period for estate taxes. Under current law, the lien ends after ten years, even if the liability has not been paid.

The third proposal increases the cap on valuation decreases for specialuse properties. The fair market value of a property for estate tax purposes is generally determined at the property’s highest and best use. An election can be made under IRC Section 2032A, however, allowing qualified real property or personal property to have its value reduced to reflect its actual use. Under current law, the reduction in value is capped at $1.31 million for decedents dying in 2023. The proposal would increase this cap to $13 million, effective for those dying on or after the election date.

Advising Clients As demonstrated by the number of repeat proposals, the Biden administration had little success enacting any prior proposals. With a Republicancontrolled House of Representatives, the administration’s chances of success only decreased when the new Congress took their seats. Nevertheless, keeping track of all the proposals covered here is essential for two reasons. First, with the headlines about taxing HNW to pay for trillions in spending, advisors can be an informed resource for their clients by understanding the details. Second, these proposals could one day become law if political fortunes change, so an understanding of the proposal helps identify current opportunities and potential future risks that could affect your clients. Third, it provides insight into what the Biden administration thinks requires statutory change versus regulatory guidance. n

Published in Probate & Property, Volume 37, No 5 © 2023 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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New Strategies for Reducing the Carbon Dioxide Emissions of Building Materials

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represents a significant impact in the short term, it is critical to understand the effects of building materials and what is being done to mitigate their impact.

The following image from the New Buildings Institute makes clear the part embodied carbon plays in the life cycle of a building, illustrating the range of embodied carbon impact.

As with energy efficiency, using an integrative design approach to reduce embodied carbon is most important.

Ideally, this includes reusing existing structures and building materials whenever possible and minimizing the use of new materials. When using new materials, green developers should use technologies that reduce CO2 emissions, some of which even use CO2 as a component of their manufacturing

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n the next 30 years, if humans keep building as they have been, the embodied carbon of building materials will have an impact on carbon dioxide (CO2) emissions similar to the operational carbon of buildings. Embodied carbon represents the emissions associated with construction materials—their extraction, manufacture, transportation to the site, construction, and end of life. Operational carbon, by contrast, represents the emissions associated with operating a building. Until recently, most of the green building movement’s focus has been on operational carbon, e.g., energy efficiency. Because embodied carbon

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By Helen J. Kessler

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process. These technologies are still in the early stages of development; however, there is a growing emphasis on such materials, and technologies are increasing rapidly.

BuildingGreen, an excellent resource for green building materials, has published an article, The Urgency of Embodied Carbon and What You Can Do About It, BuildingGreen, https://tinyurl. com/mr2kykdm, which describes the issues of embodied carbon in building materials. One of its illustrations shows how a designer could choose to reduce the impact of embodied carbon by as much as 58 percent.

In this example, architect Brad Benke studied the impacts of brick façade systems and discovered that five functionally equivalent wall types had very different embodied carbon impacts. Thin brick on metal studs, shown at the far right, reduced embodied carbon 58 percent compared with

a baseline wall system (thin brick with precast concrete).

Tools for Calculating Embodied Carbon Determining the impact of various materials on embodied carbon requires using tools for performing life cycle analysis (LCA), some paid and some free. An excellent resource is Carbon Leadership Forum (CLF) which has created various toolkits, including one for policymakers, one for owners, and one for architects. The first step is to collect the inputs used in the Life Cycle Analysis calculations, such as Environmental Product Declarations (EPDs) and Health Product Declarations (HPDs). LCA tools

use these inputs for the LCA calculations, some of which are based on the whole building and others of which are based on specific components, such as the structural elements.

Recognizing the importance of embodied carbon, recently updated rating systems, such as LEED, now include credit for embodied carbon reductions and even for the mere performance of the LCA calculations. The most credit is given to projects that reuse historic, abandoned, or blighted buildings. The British green building rating system, BREEAM, strongly focuses on LCA. The following image provides a graphic depiction of the life cycle of materials.

Helen J. Kessler, FAIA, LEED Fellow, WELL AP is President of HJKessler Associates and a Principal at UpFront Regenerative Design.

She is currently a sustainability consultant for the Discovery Partners Institute and the Advocate Aurora Healthcare Illinois Masonic Center hospital additions to the Center for Advanced Care. Helen is a frequent speaker and author on sustainability topics and teaches various courses, including “Systems Thinking for Sustainable Design” at Northwestern University.

Published in Probate & Property, Volume 37, No 5 © 2023 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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material (or Geomass) can come from recycled concrete or other industrial sources. See also Blue Planet: Cost-Effective Carbon Sequestration, BuildingGreen, https://tinyurl.com/k4efhj8j.

These products are exciting innovations because they use captured CO2 that would have otherwise been released into the atmosphere, and they reduce the amount of emissions produced by the manufacture of concrete, affecting both the cement and the aggregates. Expect more research and innovations related to concrete soon!

The following sections discuss several building materials with the highest impact on embodied carbon and the work being done to reduce that impact.

Structural Building Materials The materials with the highest impact on embodied carbon are concrete, steel, and aluminum. The structural systems of almost every commercial building use concrete and steel, but aluminum is used in the construction of windows and curtain walls. All-glass buildings with aluminum frames, therefore, often have a very high impact on embodied carbon and energy consumption.

As discussed in the introduction, the most important first step is reducing the materials used. For new buildings, steel and concrete are generally required. This article will examine ways to reduce the embodied carbon in those materials. In addition, because mass timber construction is becoming more popular, it will be discussed as an alternative.

Concrete One of the most essential components in concrete is Portland cement, which requires significant energy for its manufacture. Some have estimated that

cement production accounts for five percent to eight percent of global CO2 emissions. For years, other cementitious materials such as fly ash or blast-furnace slags have substituted for some portion of the cement used in concrete creation. Builders should discuss maximizing the use of such materials with structural engineers and the concrete mix companies.

More recently, some concrete companies have started using a product called CarbonCure. See CarbonCure’s Sustainable Concrete Solution, https:// www.carboncure.com. Its manufacturers describe on their website how it works: Concrete is made by combining water, cement, and aggregates like sand or gravel. When carbon dioxide is introduced into this mix, it reacts with the cement and mineralizes, becoming permanently stored in the concrete. The concrete is effectively liquid rock that converts carbon dioxide into stone.

Blue Planet has created a product that uses recycled carbon dioxide to make artificial limestone or calcium carbonate using a chemical process. The aggregate grows to the desired size from a small nucleus in an alkaline carbonate solution and can replace either sand or coarse aggregate. The solution’s raw

Steel The steel industry is one of the largest emitters of CO2, contributing around seven to ten percent of global greenhouse gas emissions. There are two primary steel manufacturing processes: Electric Arc Furnace and Basic Oxygen Process (Blast Furnace). The electric arc furnace process should be relied upon whenever possible because its raw material is composed of approximately 90 percent recycled steel, whereas the basic oxygen process uses roughly 25 percent recycled steel. Using recycled material as its primary input, the electric arc furnace dramatically reduces its scope by three emissions compared to the basic oxygen process. In addition, with electricity as its primary energy source, the electric arc furnace can also more easily take advantage of renewable energy from solar, wind, and hydro sources. Many steel manufacturers in the United States use electric arc furnaces, which should be required in the construction documents and specifications.

Steel manufacturers continue searching for much lower carbon alternatives.

Green Steel World is a global online magazine focused on establishing a global network of professionals involved in producing, distributing, and using lowcarbon steel. Some research focuses on using hydrogen, particularly “green” hydrogen, as a reducing agent instead of coal and coke in the steel-making process. See https://tinyurl.com/yc4828jr.

This process could be promising if the hydrogen is electrolyzed using electricity from renewable energy sources

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(wind, solar, hydro, etc.). In addition, because steel combustion is concentrated, researchers are studying how to capture the carbon dioxide from that process for potential reuse.

Some steel manufacturers are also exploring carbon offsets for their carbon emissions; however, this is an accounting methodology rather than a way to reduce the embodied carbon of the steel.

Aluminum With its high strength-to-weight ratio, aluminum is vital to building construction and is most often used for windows and curtain walls. As a highenergy-intensity material, aluminum is often manufactured in places with abundant hydropower, such as Iceland.

Aluminum is also infinitely recyclable, which means that aluminum made from recycled materials requires only five percent of the energy needed to produce aluminum from bauxite.

To reduce embodied content of aluminum, it is important to ensure that recycled aluminum is appropriate and available for the intended use and to determine where and how the aluminum is manufactured and transported to the site. Although the aluminum industry is clear about the significant use of recycled aluminum in new aluminum cans, it is the author’s experience that recycled aluminum in construction materials doesn’t meet the same lofty goals.

Wood Wood, particularly cross-laminated wood or mass timber, is gaining traction as a structural building material and a possible replacement for some of the steel and concrete currently used in buildings. Of course, wood has been used in construction for centuries, so its use is not new. However, its growing popularity in larger and taller buildings is recent and partly due to building code changes that make it possible.

Mass timber enthusiasts would likely say it is a low or no embodied carbon alternative to concrete and steel. Though it has many advantages,

Aluminum is infinitely recyclable, which means that aluminum made from recycled materials requires only five percent of the energy needed to produce aluminum from bauxite. using mass timber and calculating its embodied carbon are complicated.

In a well-researched article by Building Green, Wood, What’s Good, https:// tinyurl.com/fny7pt3p, it is suggested that users carefully consider the many reasons why they want to use wood.

Replacing steel and concrete as a sole justification may not be practical, and though embodied carbon will likely be reduced compared to those products, the amount of reduction may not be substantial due to many factors. Some of those factors can include where the wood comes from, including forest management and whether the wood is certified (Forest Stewardship Council (FSC) certification is best), the appropriateness of mass timber for the particular project, the manufacturing processes, the life of the project, transportation, and more.

An example of why a project owner might want to use wood is the concept of biophilia. As humans, we are attracted to natural materials such as wood. As a result, we often see mass timber projects as particularly beautiful.

An excellent resource for learning about mass timber is WoodWorks, the Wood Products Council, https://www. woodworks.org.

Conclusions This article has addressed structural building materials with the largest carbon footprints: concrete, steel, and aluminum, and a structural alternative to some of those materials: wood.

Progress is being made to reduce the embodied carbon intensity of these materials.

Other low-embodied carbon materials are worth considering, although most will not replace the structural materials discussed in this article.

Some of those materials include bamboo, hemp, cellulose (e.g., recycled paper), strawbale, and dirt (e.g., adobe and rammed earth). These materials have been used worldwide for centuries and are being revived as we focus on embodied carbon and emissions reductions. In addition to focusing on manufacturing these materials, researchers have developed practical tools to understand embodied carbon and its life cycle analysis better. Thirdparty reviewed documents, such as Environmental Product Declarations, are available that will help designers make informed decisions. n

Information Sources • Carbon Leadership Forum, https://carbonleadershipforum.org • Building Transparency, https:// www.buildingtransparency.org/ about/what (developer of the Embodied Carbon in Construction Calculator (EC3)) • Building Green, https:// www.buildinggreen.com/ knowledge-base • New Buildings Institute, https://newbuildings.org • RMI, https://rmi.org • Athena Sustainable Materials Institute, https://www.athenasmi. org/what-we-do/overview

Published in Probate & Property, Volume 37, No 5 © 2023 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.

September/October 2023 35

Maximizing Efficiency in Estate Administration: The Role of Paralegals

By Imaan Moughal Saleem and Robert M. Nemzin

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s trusts and estates professionals, we are acutely aware of the complexities and challenges that can arise during estate administration. The process requires a deep understanding of the relevant laws and regulations, meticulous attention to detail, and the ability to navigate sensitive family dynamics. Given the many tasks and responsibilities involved, trusts and estates attorneys and their teams must work efficiently and effectively to ensure the administration process runs smoothly. In this article, we focus on paralegals’ critical roles in supporting attorneys and firms during the estate administration process. By examining how paralegals can help organize and streamline the administration process, we hope to provide insights and practical guidance for our trusts and estates colleagues.

Imaan Moughal Saleem is a trusts and estates attorney at Manice Budd & Baggett LLP and an adjunct professor of law at Hofstra Law School. Robert M. Nemzin is a senior wealth planner for HSBC Private Bank.

Published in Probate & Property, Volume 37, No 5 © 2023 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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Pre-Mortem Planning Paralegals can provide valuable support to attorneys in premortem estate administration. They can play a critical role by reviewing and updating estate planning documents, such as wills, trusts, powers of attorney, and advance health care directives. This involves checking the documents for accuracy and ensuring they reflect the client’s current wishes and circumstances. Paralegals can help the attorney gather and organize important documents and assets, including bank and account statements, insurance policies, and other financial information, such as copies of tax returns, wealth statements, and balance sheets. A skilled paralegal can allow this complex process to be completed efficiently and accurately.

Additionally, paralegals can be crucial in tax planning, identifying potential tax issues, and working with the attorney to develop strategies to minimize the estate’s tax liability. Finally, paralegals can help the attorney understand and manage the family dynamics involved in estate administration, anticipate potential conflicts, and mitigate them before they arise. Paralegals’ support in these and other areas can help attorneys streamline the pre-mortem estate administration process to ensure that the client’s wishes are carried out promptly and accurately.

Gathering Relevant Information Review Existing Plans (if any). One of the most critical tasks in estate administration is reviewing and updating estate planning documents. Paralegals can help ensure that estate plans reflect the client’s current wishes, that fiduciaries and beneficiaries are correctly identified, and that dispositive provisions are accurate.

They can also assist with any necessary estate plan changes, such as changing fiduciaries or updating bequests, and aid in properly executing any new documents.

Locate Documents and Assets.

Another crucial task in estate administration is gathering and organizing important documents. Paralegals can help locate wills, trusts, powers of attorney, deeds, stock certificates, tax returns, and other vital documents necessary for administering the estate. They can also help identify and review the titling of all the client’s assets, such as real estate, bank accounts, investments, retirement accounts, and life insurance policies. As part of this process paralegals can help determine whether any changes need to be made to the title of existing assets and whether there are any unintended consequences that may result from the current title. This helps to prepare for or potentially avoid the probate process.

Plan for Access to Digital Assets.

Paralegals can help attorneys organize their clients’ digital assets by identifying email accounts, online accounts, social media accounts, and hardware such as computers and phones. They can help develop passwords and login

information and determine whether existing planning documents permit fiduciaries to access digital assets. By understanding the full extent of a client’s digital footprint, paralegals can enable attorneys to effectively manage digital assets in estate administration. This information is all the more necessary in our digital world, when clients often receive only electronic access to account information rather than mailed physical paper statements.

Figure out Family Dynamics. Family dynamics are often complicated, and paralegals can assist attorneys in managing these situations. Based on the relationships among family members and beneficiaries, paralegals can help identify any problems in advance and allow attorneys to plan accordingly. Postmortem, they can draft letters to notify beneficiaries and heirs of the decedent’s death, answer any questions, and provide a copy of the will.

Tax Planning Tax considerations are essential to estate administration, and paralegals can assist attorneys in this area.

Charitable planning. Recognizing any opportunities from a charitable deduction perspective, both income tax and estate tax, is essential in pre-mortem planning with a client. Paralegals can help identify any planning opportunities through conversations with the client about any charitable inclinations they want to include in their overall estate plan. These discussions could lead to tremendous income or estate tax savings for the client, related both to the size of their overall estate and to any income tax attributes in that year.

End of Life Gifting. Last-minute gifting before a client’s death can transfer a large amount of wealth from the client’s estate, provided it is done on a non-taxable basis. Paralegals can aid this process by determining any annual exclusion gifts already made in the calendar year and then identifying any additional annual exclusion gifts that can be made before death. Making gifts directly to educational institutions for a beneficiary’s tuition or to medical providers for medical expenses should also be

considered to use the unlimited exclusion for these purposes permitted under the Internal Revenue Code.

Grantor Trust and Income Tax Basis Planning. Grantor trust and income tax basis planning can achieve tremendous income tax benefits before death if swapping assets is feasible. Paralegals can help where irrevocable grantor trusts exist and include the power to swap assets in and out of the trust and aid in the documentation needed to evidence these transactions. Identifying these opportunities can provide tremendous value to the clients and their estates by maximizing the income tax basis stepup for the clients’ assets following their deaths.

Post-Mortem Administration Paralegals can make valuable contributions to the estate administration process. Below is an overview of 10 ways that paralegals can help administer a decedent’s estate. Each step is essential to ensure that the estate is distributed fairly, efficiently, and in accordance with the law and the decedent’s directions.

By following these steps and working closely with the attorney and other parties involved, paralegals can play a critical role in the estate administration.

1. Gather Documents Necessary for Estate Administration One of the most essential roles of a paralegal in estate administration is gathering all the necessary documents related to the estate. These documents include the will, death certificate, insurance policies, financial records, and any other relevant documents. Each document must be reviewed to ensure it is complete and accurate. The paralegal should keep a detailed inventory of all collected documents and ensure they are organized and easily accessible. This allows the paralegal to assist the attorney in carrying out the decedent’s wishes efficiently and effectively.

2. Notify Beneficiaries and Heirs Once all documents have been gathered, a paralegal can assist in notifying all beneficiaries and heirs of the decedent’s death and providing them with

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a copy of the will or any other required documentation. It is vital to ensure all beneficiaries and heirs are properly identified and have their correct contact information. The paralegal can also answer questions from beneficiaries and heirs about the estate and their rights under the will. By providing clear and concise information, the paralegal can help prevent confusion and disputes among interested parties.

accounted for and properly distributed to the appropriate beneficiaries or heirs.

Paralegals should review the inventory regularly to ensure that all changes are correctly recorded and that the inventory is always accurate and up-to-date.

3. Contact Creditors and Debtors Another important task for the paralegal in estate administration is contacting all creditors and debtors to determine outstanding debts and obligations, verifying the validity of each claim, and negotiating with creditors when necessary. The paralegal should keep detailed records of all communication with creditors and debtors and update the estate inventory accordingly. By effectively managing the estate’s debts and obligations, the paralegal can help ensure that the estate is administered correctly and that all interested parties are treated fairly.

6. File Tax Documents Tax compliance is a critical aspect of estate administration, and paralegals play an essential role in ensuring that all necessary tax documents are prepared and filed correctly. They may prepare and file all the required tax returns related to the estate, including income and estate tax returns. This involves working closely with the accountant and the attorney to ensure that all tax requirements are met, tax returns are properly formatted and filed with the appropriate government agency, and all deadlines are met. They should keep accurate records of all tax-related documents, communicate with the relevant parties, and potentially assist in preparing documents related to a qualified disclaimer.

4. Prepare Filings Preparing and filing necessary legal documents is another critical task for the paralegal in estate administration. This includes court petitions, letters, and motions. The paralegal should work closely with the attorney to ensure that all legal requirements are met, all documents comply with applicable guidelines and are filed with the appropriate court or sent to the appropriate recipients, and all deadlines are met. By staying on top of the filing process, the paralegal can help ensure that the estate is administered promptly and efficiently.

7. Communicate Clear and effective communication is essential in estate administration, and paralegals play an important role. They must communicate effectively with all parties involved in estate administration, including the court, attorneys, and interested parties and ensure that all communication is clear and professional and that all parties are informed of any developments or changes in the administration process. Paralegals need to keep detailed records of all communication and update interested parties, as necessary.

5. Inventory Paralegals play a crucial role in the inventory process of estate administration. They may be responsible for creating and maintaining an accurate and up-to-date inventory of an estate’s assets and debts. This involves conducting a thorough review of all documents and records collected and keeping track of any changes that occur throughout the administration process. A detailed inventory ensures all assets are

8. Transfer of Assets Paralegals play a crucial role in transferring assets to the appropriate beneficiaries or heirs—drafting. transfer documents, ensuring all necessary parties are involved in the transfer process, and confirming that all transfers are completed accurately and efficiently.

Paralegals work closely with the attorney and interested parties to confirm all transfer agreements are properly executed.

9. Records Paralegals maintain accurate records of all transactions and communication related to the estate. They track all financial transactions, phone calls, and emails.

They review records regularly to ensure they are accurate and up-to-date. Accurate records are essential to ensure that all transactions are properly recorded and that there is a clear record of all communication related to the estate.

10. Distribution of Assets Finally, paralegals play a critical role in the distribution of assets and closure of the estate. They help the attorney distribute assets and draft distribution agreements and documents, such as receipts and releases. Paralegals work closely with the attorney and interested parties to ensure that all distribution agreements are properly executed. They also complete all final tax returns and other legal requirements needed to close the estate. Paralegals play a crucial role in ensuring that the estate administration process is completed efficiently and effectively, allowing beneficiaries and heirs to receive their inheritance as soon as possible.

Conclusion Estate administration can be a complex and time-consuming process and requires a strong collaboration between attorneys and paralegals to ensure that everything is organized and executed smoothly, both at the end stages of the clients’ lives and following their deaths.

Attorneys rely heavily on their paralegals to help them manage the many moving parts of an estate administration case, from gathering documents to communicating with clients and stakeholders.

A well-functioning attorney-paralegal team maximizes efficiency and delivers optimal client results. By leveraging each other’s strengths and expertise, attorneys and paralegals can form a dynamic team capable of confidently and easily managing even the most complex estate administration cases. n

Published in Probate & Property, Volume 37, No 5 © 2023 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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September/October 2023 39

HELPING GOOD GET TO GREAT The Power of an Effective Mentoring Process

By Jo Ann Engelhardt, Timnetra Burruss, and Daniel Q. Orvin

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Why Mentoring Is Important and How to Structure an Effective Mentoring Process Whether in law practice or in professional organizations like the ABA, research indicates that lawyers with mentors advance faster, perform jobs and tasks more efficiently, and experience higher work-life satisfaction. Although 76 percent of working professionals believe having a mentor is important, more than 54 percent do not have a mentoring relationship. See Mark Horozowski, How to Build a Great Relationship with a Mentor, https://tinyurl.com/2p96z35p.

Jo Ann Engelhardt is a member of the ABA Board of Governors and the American Bar Foundation, where she is co-Chair of the Florida Fellows. Timnetra Burruss is Co-Chair of the RPTE Diversity, Equity, and Inclusion Standing Committee and a Past RPTE Fellow.

Daniel Q. Orvin is Co-Chair of the RPTE Leadership and Mentoring Committee, ABA Advisor to ULC Study Committee for Use of Tenant information in Rental Decisions, and Advisor to RPTE Real Property Government Submissions.

A recent UC Davis article discussed the specific benefits of mentoring to mentees, mentors, and organizations in which they are involved. See The Benefits of Mentoring, https:// tinyurl.com/4sahjrzt.

Benefits to the Mentee The benefits of being mentored can be broadly described in three categories: developing professional skills and competencies; developing personal skills and competencies; and building a network of advisors, supporters, and guides.

Whether you work in a law firm, government office, or corporation, or are a solo practitioner, spending time with someone more seasoned can help you do your job better. Having a mentor means you can learn from your experience and that of your mentor, and you may sidestep potential mistakes.

A mentor can foster workplace success by imparting institutional knowledge, including how things “really” get done. In addition, a mentor can showcase new approaches to work to help the mentee build flexible skills. A mentor can ensure the mentee receives professional development opportunities in organizations where the mentor has clout.

In addition, an effective mentor will guide the mentee in burnishing the mentee’s personal skills. Learning to network, to run a meeting well, or to deal with difficult colleagues or clients

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t RPTE’s National CLE Conference on May 11-12, 2023, the Leadership and Mentoring Committee’s program explored three aspects of the mentoring

with tact and respect is never easy, but a skilled mentor can smooth the way. A mentor can be a confidential sounding board and a trusted critic. It’s a confidence booster to receive guidance and support from a respected law firm, government office, or legal organization member.

Finally, an effective mentor helps the mentee build a network of colleagues within and outside the workplace. Most successful job seekers credit networking with assisting them in securing their dream job and expanding their knowledge of different law fields and different work environments.

Benefits to the Mentor If you ask mentors why they take the time and effort to serve, many say mentoring provides fulfillment and satisfaction in contributing to their colleagues’ development. This is often reason enough, but there are other valuable benefits to the mentor. In helping a mentee, the mentor may recognize areas where she can develop greater skills and abilities and challenge the status quo. Like the mentee, the mentor extends her professional colleague network and builds community. Mentors also find that the process encourages new perspectives on the mentor’s leadership role. Mentors also can benefit from the relationship through a concept called “mentoring up,” which empowers mentees to share their expertise and knowledge with their mentors.

Benefits to the Employer and Professional Organization A commitment to a successful mentoring process demonstrates dedication to employee or volunteer development and continuous learning. Job seekers may rate a firm that offers mentoring more highly than one that does not. Potential firm clients may factor in a mentoring program’s benefits when hiring decisions for representation or services.

A thoughtful, well-run mentoring process facilitates the growth and development of high-potential leaders, adding to the organization’s bottom line. It also helps organizational continuity by ensuring that institutional knowledge is

maintained and transferred across the organization. If an organization does not have a program, it should consider supporting the employee’s participation in mentoring and professional development programs outside the organization.

Finally, mentoring fosters an inclusive, diverse, and collaborative environment. Numerous studies and articles have related how diverse teams and organizations drive superior outcomes, including greater profitability compared to less diverse organizations.

How to Structure an Effective Mentoring Process Structuring an effective mentoring process begins with identifying mentees and mentors.

Identifying Mentees The prospective mentee should both desire to learn and continue to develop professionally and believe that such growth is possible. An attorney expanding to a new practice area can significantly decrease the learning curve through a mentoring relationship with an attorney experienced in that area.

A new leader in the ABA can likewise reduce the learning curve on how an ABA Section works and how to advance in leadership. Law firms, governmental entities, or legal organizations should consider individuals who have (i) voiced an interest in being mentored, (ii) been identified by senior lawyers as someone whose practice or work could benefit from mentoring, (iii) recently joined a new firm (or legal organization), or (iv) moved into a new practice area. In addition, the mentee should have the time to devote to the process. Otherwise, the process will not be fruitful.

Identifying Mentors The firm or legal organization must determine the qualifications of a mentor because mentoring goals can differ.

Further, no bright-line rule says a mentor must have a certain amount of experience or a specific subject matter expertise. Mentors exhibit interpersonal skills and the ability to impart quality lessons about the legal profession or participation in the applicable legal

organization. A mentor must be able to devote the time necessary to allow for a meaningful ongoing relationship to develop.

Matching Mentors and Mentees Matching mentors and mentees can be the most critical part of a mentoring process. The mentor and mentee must get along or at least be compatible to promote professional growth through personal relationships. The mentoring relationships that tend to be the most successful are those where a level of trust exists to allow sharing of personal and professional information. Arranged mentorships can also be effective, assuming the mentor and mentee can find common ground through practice areas, interests, or other factors.

Each Participant’s Role in the Process From the mentee’s perspective: • Once you have a mentor, you should ask questions—lots of them. Mentors can provide valuable professional opportunities, such as introducing their mentees to local lawyers, judges, and other community leaders. Mentors can also serve as a bridge to assist mentees in other professional goals, such as serving on committees and boards.

• If you’re newer to the practice, ask mentors for advice on avoiding common mistakes less seasoned lawyers make. Mentors can also help address demanding clients, co-workers, opposing counsel, or managers.

• Include a discussion on managing stress and wellness concerns and be candid if you are struggling with these issues. Your mentor can steer you to helpful resources.

• Invite your mentor to see you in action, whether presenting, in court, or otherwise in the workplace. Your mentor can help you prepare and can give you meaningful feedback. Also, invite your mentor to events or organizations you are a part of to allow your mentor to see other aspects

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September/October 2023 41

of your personal and professional life.

From the mentor’s perspective: • Always keep your “office” door open. Your mentee needs to know you are available at scheduled times and as needed. It’s okay to set boundaries, but try to give a little extra, especially at the beginning of a relationship.

• Set the same high standard for your mentee as you do for yourself. Use praise to reinforce that standard but be candid when improvement is needed. Please don’t confuse being a mentor with being someone’s boss: it’s a privilege to work with another professional, and you need to ensure a culture of respect. The mentee is not there to take over tasks you are disinclined to take on yourself.

• Ensure you let workplace or organization leadership know how your mentee can contribute. (See more below regarding sponsorship.)

How a Successful Mentoring Process Can Advance Diversity, Equity, and Inclusion For context, we can look at the most recent ABA national study of lawyer representation by gender, race, and ethnicity, a ten-year survey of demographics.

Not surprisingly, diverse attorneys have made few gains in the last decade.

An ABA study shows the most significant increase was made by women, from 33 percent to 38 percent representation. African American and Native American lawyer populations were essentially flat, while Asian and Hispanic attorneys were in the low single digits. The legal profession is still almost two-thirds male and 81 percent Caucasian/white, though the population is 49 percent male and 61 percent white. See ABA National Lawyer Population Survey, https://tinyurl. com/335dvzpa.

These studies and others like them demonstrate that diverse attorneys are underrepresented in the profession and

People of color who advance the furthest all share one characteristic—a strong network of mentors and corporate sponsors who nurture their professional development. its higher ranks. Can mentoring help to narrow this gap?

The Benefits of Mentoring with a Focus on DEI Although mentoring programs have existed in the legal industry for some time, the data above demonstrate a slight improvement in overall diversity in the profession. A logical conclusion is that traditional mentoring has not been effective in increasing diversity; another is that not enough workplaces have robust mentoring programs to address the gap.

Ida Abbott, a consultant and mentoring expert, noted: Firms have done well in recruiting women and minority lawyers at the entry-level, but the pipeline leaks at a rapid pace, and these lawyers remain shamefully underrepresented in partnership and leadership. When done well, mentoring is a proven way to slow the pipeline’s leaks by providing the personal attention and individualized support that engages these lawyers, makes them feel valued, and helps them see the possibility of a successful and satisfying future in the firm.

Innovative Mentoring Increase Diversity and Inclusion, NALP PD Quarterly, at 44 (Feb. 2018).

One of the most thoughtful reviews of the difference between mentoring whites and mentoring minorities is David A.

Thomas’s article “Race Matters,” Harvard Business Review, April 2001. Though the article is over 20 years old, its message is still relevant. His research shows that “whites and minorities follow distinct patterns of advancement,” with whites’ careers advancing much more quickly in the early years than minorities. He sees how mentoring can make a meaningful difference: “The people of color who advance the furthest all share one characteristic—a strong network of mentors and corporate sponsors who nurture their professional development.”

Thomas cites several benefits to the mentee from a robust mentoring relationship: • Mentees received more challenging assignments to help them build critical skills • By putting mentees into “hightrust positions,” mentors signaled to the organization that the mentee was a credible high performer.

• Mentees received career advice that kept them on a leadership path and guided them toward better positions over time.

• Mentors defended mentees who were criticized or unfairly stereotyped.

He also reminds us to support and complement one-on-one efforts by taking additional steps, including ensuring a diverse pool of candidates for every position and tackling what he calls “implicit rules”—e.g., the assumption that those not on the fast track early will never rise to leadership positions.

Another integral tool for advancing diverse attorneys involves sponsorship, in contrast to mentorship. In the June 30, 2021, Harvard Business Review, Rosalind Chow distinguishes between these two approaches and argues that although mentoring is valuable for providing direct guidance, information, and feedback, sponsorship focuses on “the management of others’ views on the sponsored employee” (italics in original).

She likens it to being a brand manager or publicist for the mentee, ensuring that the sponsor: • Amplifies and shares the mentee’s accomplishments with the appropriate audience. Not all mentees

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are comfortable doing so for themselves, so a well-placed sponsor must shine a light on the mentee’s work.

• Puts the sponsor’s reputation behind the promise of success.

Chow gives the example of a letter of recommendation or a referral — both convey legitimacy.

• Connects the mentee with the mentor’s circle, inviting the mentee to participate in high-level events and leadership roles. The invitation is a badge of belonging.

• Defends the mentee against bias.

Recall the test that revealed that lawyers graded the same essay more harshly when it appeared a person of color drafted it. A sponsor can challenge the bias, but Chow notes it takes courage.

Addressing Difficult Conversations for Both Sides In the December/January 2022-23 ABA Journal, “State of the Profession,” a law firm consultant identifies a barrier to the advancement of diverse attorneys. “Lawyers who are in a position to include other lawyers in the firm on their matters or share credit often are more likely to do that with people who they know and trust. And often lawyers build trust with people like them, rather than people who aren’t like them.” See id. at 37. The article also points to the dominance of Ivy League-educated lawyers and judges. An effective mentoring and sponsorship process can help ensure that diverse attorneys from various educational backgrounds become part of the trusted group and are visible when opportunities for advancement arise.

How to Avoid Common Roadblocks to a Successful Mentoring Process We are deliberately using the term “process” here: mentorship is a living, evolving stream of events, thoughts, feedback, and evaluation that does not have a distinct terminus. The process changes, depending on the mentee’s role, point in the mentee’s career, and needs at a given time.

Mentorship is a living, evolving stream of events, thoughts, feedback, and evaluation that does not have a distinct terminus.

Guidelines for Mentors Too many people think the most important part of mentoring is talking. If you do all the talking, the mentee may learn something but probably nothing that needs a mentoring relationship to convey. Listening to those you mentor allows them to share their insight and thought processes.

Mentors need to keep their skills fresh. It is never too late to acquire new mentoring skills. Processes evolve, and so should you.

Be flexible. Work to the mentees’ strengths and help them overcome their weaknesses. As the mentor, allow yourself to learn from your mentee—that’s one of the most significant rewards.

Allow people to fail and embrace the “successful failure.” Failure can teach a great deal about the mentee’s strengths and weaknesses.

As noted in SmartBusiness Broward/ Palm Beach, March 2005, “Managing for Tomorrow”: “As followers improve their performance, leadership style needs to move from telling followers what to do, to mentoring and persuading them, then to encouraging and facilitating their actions, and finally to simply entrusting them and monitoring their progress.” A mentor who flexibly adapts as the mentee gains skills and achieves milestones can help a mentee not just to the next position but to satisfy personal and professional success that can span a career.

Guidelines for Mentees Be scrupulously honest with your

mentor. If you have only limited time, say so upfront.

Work to create what psychologist Carol Dweck calls a growth mindset: “Individuals who believe their talents can be developed (through hard work, good strategies, and input from others) have a growth mindset. They tend to achieve more than those with a more fixed mindset (those who believe their talents are innate gifts).” Carol Dweck, What Having a “Growth Mindset” Actually Means, Harvard Business Review, Jan. 13, 2018.

Feedback from Previous and Current Mentees and Mentors in the Section’s Program We asked a few mentors and mentees to share their experiences and feedback about the process.

From a Mentee: “My experience was enjoyable and fruitful. Specifically, my conversations with my mentor helped me to get comfortable with ‘possibility.’

I had a hard time imagining that I could be active in leadership or participate in academic panels. My mentor showed me that possibility was real and helped me get started with ideas, materials, and even as a speaker at one of my events.”

From a Mentor: “My mentee feels that being from a small firm, she doesn’t have a lot of specialized knowledge to contribute. I encouraged her not to discount her knowledge and experience as a unique person with her own individual perspective. When she has client experiences, she can share what she learned with other lawyers through e-Report or Probate & Property, Group calls, or Group CLE programs.“ In reflecting on this process, the mentor observed: “Our conversation is very common for a lawyer from a small firm.

Another small firm mentee told me that the high level of involvement we have seen from her is a direct result of the process. She had underestimated what she could contribute; our discussion revealed ways she could participate.”

For those interested in learning how the RPTE Leadership and Mentoring process has operated thus far, please see “Perfect Pairings” in the January/February 2023 issue of Probate & Property. n

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September/October 2023 43

A Brief Primer on the Fiduciary Duties of Real Estate Brokers

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n my time as an attorney, the longrunning joke about real estate brokers is they only care about one thing—their commission. If you just chuckled, then you know what I am talking about. Fortunately, most real estate brokers are not quite so avaricious. But even the most ethical real estate brokers can make mistakes. This article will provide an overview of the fiduciary duties real estate brokers owe to their clients and how it benefits us, legal practitioners, to remind them of those obligations.

Josh Crowfoot is the founder of Crowfoot Law Firm and chairs Young Lawyers Network and the Assignment and Subleasing Committee for the Leasing Group. He also edits RP books and recruits authors to write for the Section.

How Real Estate Brokers Violate Their Fiduciary Duties Real estate brokers have fiduciary duties to their clients. Black’s Law Dictionary defines a “fiduciary” as “[a] person who is required to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith, trust, confidence, and candor.” Black’s Law Dictionary 702 (9th ed.

2009). The relationship between a real estate broker and a property owner for whom the agent has by contract agreed to sell the owner’s property is that of principal and agent. In the words of one court, a real estate broker “owes a fiduciary duty (1) to use reasonable care, skill, and diligence in procuring the greatest advantage to his client, and (2) to act honestly and in good faith, making full disclosures to his client of all material facts affecting his interest.”

Vogt v. Town & Country Realty, 231 N.W.2d 496, 501 (Neb. 1975).

A real estate broker fulfills his duties of reasonable care, skill, and diligence when he performs his role in the real estate transaction in a competent manner that conforms with the standard of the profession when he uses knowledge and takes action learned from his professional education and experience and when he diligently pursues facts and information that assists the client. In addition, a real estate broker must act honestly and in good faith, but it goes beyond that. The real estate broker has a duty of loyalty to his client. The real estate broker must put his client’s interest above his own. Finally, the real estate broker must disclose any fact material to the client’s decision to purchase or sell real estate.

A breach of a real estate broker’s duty of care would be not taking reasonable

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By Josh Crowfoot

care to determine that all representations made by his client are true. McRae v. Hagaman, 2004 WL 2378109, at *5 (Tenn. Ct. App. Oct. 25, 2004). An example would be a real estate broker not reading the terms of a purchase contract or not making inquiries regarding flooding that may have occurred on the subject property. See Staggs v. Sells, 86 S.W.3d 219 (Tenn. Ct. App. 2001). In Staggs, the seller was aware of the flooding but not asked about it by its real estate broker, and the purchase contract had a representation stating “that the Property has not been damaged or affected by flood or storm runoff and that the Property does/does not require flood insurance.” Id. at 221.

The real estate broker checked the box next to the phrase “does not.” Id. As a result of the real estate broker’s breach of the duty of care, the court found the broker’s client liable for negligent misrepresentation.

The Staggs court stated the following: The statement regarding flooding and storm runoff was patently false. Defendants’ [real estate broker] had an obligation to use reasonable care in determining that all representations made in the contract were true and correct. Such care was not used, and Defendants, as the principal, are now responsible for the negligence of their agent.

Id. at 223.

The author strongly suspects that the errors and omissions insurance policy for the real estate broker likely paid out on any claim made by the real estate broker’s client concerning the matter.

An example of a breach of a real estate broker’s duty of skill would be failure to memorialize an amendment to the purchase and sale agreement by having it written and signed by the parties. The real estate broker’s failure to do this violates the Statute of Frauds, which all real estate brokers should know well. As stated by one court, “[t]he care and skill required [of a real estate broker] is that generally possessed and

A real estate broker’s most important duty to the client is to fully, fairly, and promptly disclose all facts that might affect the client’s interest.

exercised by persons engaged in the same business.” Cummings v. Carroll, 866 S.E.2d 675, 695 (N.C. 2021).

An example of a breach of a real estate broker’s duty of diligence would be a failure to determine whether a prospective real estate purchaser has the financial means to purchase real estate being sold by the broker’s client. See Marcotte Realty & Auction, Inc. v. Melvin Schumacher & Schumacher Bros., Inc., 624 P.2d 420, 429 (Kan. 1981) (stating, “It is no longer open to argument that one of a broker’s duties is to produce a prospective buyer who is financially capable of purchasing the listed property upon terms acceptable to the seller . . . How extensive is the broker’s duty to delve into the personal financial status of a prospective buyer? No definite statement of that duty, which would apply to all conceivable factual situations, can be formulated. One can safely say that a broker is required to exercise reasonable diligence and effort under the circumstances of the particular factual situation existing at the time.”)

An example of a breach of a real estate broker’s duty to act honestly and in good faith is an outright lie about the property no longer being available for purchase after it was already placed

under contract. See Porter v. Tenn. Real Estate Comm’n, 271 S.W.2d 21 (Tenn.

Ct. App. 1954). In Porter, the real estate broker negotiated a contract between his clients and sellers and subsequently promoted the sale of the exact property to a second purchaser without regard to the contract previously entered into.

The real estate broker told his original clients the property had been sold to another purchaser by another agent employed in his office. Id. at 23. When asked about his deceptive conduct in court, the real estate broker candidly replied, “Well, I misrepresented, sir. I misrepresented, I am sorry to say.” Id. A real estate broker’s most important duty to the client is to fully, fairly, and promptly disclose all facts that might affect the client’s interest. If a real estate broker is representing a buyer of real estate, this would include a duty to disclose (i) that the seller has expressed a willingness to accept a lower price than its asking offer; (ii) anything that is affecting the value of a property; (iii) any past existing offers or counter-offers that have been made on a property; (iv) how long a property has been on the market; (v) whether the broker has an existing relationship with the seller of the property; (vi) seller’s urgency to sell a property; and (vii) any fact or information that would help the buyer obtain a property for a lower price. What is a Real Estate Agent’s Fiduciary Duty?, Seller’s Shield (April 13, 2020), https://tinyurl.com/4uu82c8f.

If a real estate broker is representing a seller of real estate, this would include a duty to disclose (i) whether the real estate broker has a relationship with the buyer; (ii) the identity of anyone who has placed a bid on the seller’s property; (iii) all offers made on the seller’s property; (iv) anything that would affect the value of the seller’s property; (v) whether the buyer is willing to pay a higher price for the property; (vi) any information that would affect the seller’s ability to get a higher price for the property, and (vii) whether the buyer has any intention to subdivide the seller’s property or resell it for a higher price. Id.

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September/October 2023 45

Takeaways for Advising Real Estate Brokers Real estate brokers are a valuable source of business referrals to real estate lawyers. If your practice area includes handling commercial leases, residential closings, or commercial closings, then you know the value of real estate brokers to your practice.

In the author’s experience with commercial real estate transactions, real estate brokers tend to be more sophisticated and not “quarterback” the deals—the attorney does that. The brokers primarily handle acquisition of the prospective tenant or buyer. The attorney may or may not handle drafting the letter of intent for a commercial lease but will certainly handle the drafting of the lease. For a commercial closing, the same is true. The attorney may or may not draft the letter of intent for the purchase or sale of commercial real estate but will certainly handle the drafting of the contract. Commercial brokers do not need that much “handholding.”

Residential closings are entirely different. The brokers for residential closings may not be as sophisticated as those for commercial closings and

tend to handle a lot of the closing themselves—completing the purchase and sale agreement and guiding the client through the transaction until the very end. The residential closing attorney tends to stay in the background much of the time, handling the title review, preparing a title commitment for title insurance, preparing the settlement statement, disbursing funds, and managing all post-closing matters. That’s true for the author in the “attorney states” he’s licensed in, including South Carolina and Georgia. In many jurisdictions, however, title companies will handle this aspect of the closing and have attorneys on staff to assist. Still, attorneys are not required to effectuate the residential closing (or commercial real estate closing, for that matter).

Because real estate brokers are so much more hands-on in a residential closing, there is a greater potential for breach of fiduciary duties during the transaction.

And it would be wise for us, as lawyers, to counsel them when we can.

Whether you primarily handle commercial or residential matters, finding ways to remind brokers of their fiduciary duties to their clients can

build rapport with these great referral sources. These reminders can come in e-newsletters, articles you write (which can be shared with these referral sources), or content you post online on your website or social media (LinkedIn, Twitter). These reminders position you as the expert on the matter and let brokers know you are the person to call if a fiduciary issue with a client arises. You can then handle that matter or refer it to a colleague or outside attorney who can assist. In either scenario, it is good business.

Conclusion Real estate brokers owe fiduciary duties to their clients, including providing reasonable care, skill, and diligence in their transactions. In addition, real estate brokers have a duty of honesty and good faith and to disclose any issues that are material to a client’s decision to lease, buy, or sell real estate. Real estate brokers can be valuable referral sources for real estate lawyers. It behooves us to remind them of their fiduciary duties to their clients for their benefit and our own. n

Litigating Constructive Trusts

By Paul Golden Unlike traditional express trusts that are planned well in advance with all parties involved agreeing to roles as trustee and beneficiary, a constructive trust is one created solely by a judge as a distinct remedy—powerful, nuanced, and often complex and daunting. Whether you are litigating in their favor or defending in such a case, this book is an essential guide on the topic, covering crucial considerations a practitioner will need to know including strategies for handling pleadings, discovery, motion practice, and trials.

ambar.org/constructivetrust Published in Probate & Property, Volume 37, No 5 © 2023 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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The Most Important Things to Know When Insuring Lease Work Letter Construction

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Projects, Part One

Liability Insurance

By Janet M. Johnson

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his article is Part One of a two-part series on insurance for construction projects governed by commercial lease work letters under which either the landlord or the tenant is responsible for engaging the contractor to perform the work. This part focuses on liability insurance. Part Two will focus on property insurance. This article is a companion to the recent two-part article published in Probate & Property magazine by Marie A. Moore and G. Trippe Hawthorne on lease work letters, which addressed the non-insurance obligations of the parties to a lease concerning the construction of tenant improvements to the premises.

Introduction to Insurance for Work Letters When a landlord embarks on a construction-related leasehold improvements project for an existing or new tenant, both the landlord and the tenant must consider what type of liability insurance and what type of property insurance should be procured and by which party.

This is also true when a tenant that either occupies or Janet M. Johnson is a partner in the Chicago, Illinois, office of ArentFox Schiff LLP.

Published in Probate & Property, Volume 37, No 5 © 2023 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.

September/October 2023 47

is planning to move into an existing building will be constructing leasehold improvements to its space. The insurance provisions contained in the body of the lease that govern property damage or personal injury claims may not suffice to cover the additional risks associated with a construction project.

Tenant work letters (generally separate attachments to a commercial lease that outline what work will be done, who will perform it, and who pays for it) can cover anything from minor alterations to existing improvements, construction of a new building, or gutting and building out a brand-new space within an existing building. As each project differs, the insurable risks and coverages will vary.

This article does not cover the myriad other issues associated with work letters addressed by the Moore/Hawthorne article. In addition, it does not address all other insurance issues that might arise during construction, especially where the leasehold improvements to be constructed under a work letter are more complex, such as an addition to an existing building or a brand-new, build-to-suit building.

These latter types of projects require consideration of many other types of insurance products. Instead, the focus of this two-part series is on the more customary types of insurance that should be considered for the two types of work letters discussed in the companion article: (1) a customary office lease work letter where the landlord is to construct the leasehold improvements for the tenant and provides an allowance to fund all or some portion of that work; and (2) a work letter for a retail or office space in which the tenant performs the construction and the landlord provides an allowance to fund all or some portion of that work.

Commercial General Liability Insurance Commercial general liability (CGL) insurance is commonly required of both the landlord and the tenant in leases of commercial office and retail properties. Many other parties, however, will enter the premises within a

building and common areas to perform portions of the work under a lease work letter. Entries by a contractor (and its subcontractors or sub-subcontractors) is inherently more likely to result in injury to persons or the property of the landlord, the tenant (if the work letter involves construction within a tenant’s existing space), and other tenants in multi-tenant buildings than the entries occurring under ordinary operations.

The work of subcontractors or subsubcontractors can also be damaged by persons performing other portions of the leasehold improvements work contemplated in a work letter.

What Is Covered by CGL Insurance?

A CGL policy is third party insurance because it covers injuries or damage suffered by third parties. It does not cover injuries or damages sustained by the named insured. If the policy covers an accident or occurrence on the property, CGL insurance pays defense costs and amounts that the insured must pay to a third party (up to the limits available under the policy). The entity that obtains the CGL insurance policy (CGL policy) is the “named insured.”

The most commonly available Insurance Services Office, Inc. (ISO) form CGL policy (ISO CGL policy) is the ISO Form CG 00 01 04 13, with CG 00 01 indicating the type of commercial general liability coverage form and 04 13 indicating the month and year in which ISO adopted the form. In this policy form, the insurer generally agrees both (i) to pay “those sums that the insured becomes legally obligated to pay as damage because of ‘bodily injury’ or ‘property damage’” described in the policy as being covered and (ii) “to defend the insured against any ‘suit’ seeking those damages.”

The ISO CGL policy excludes the named insured’s contractual liability but also sets out an exception to this exclusion. Under the exception, the ISO CGL policy does not exclude liability that the insured would have had in the absence of agreement or liability for most “bodily injury” or “property damage” assumed in an “insured contract.”

A lease is an “insured contract” (one of the six specified types of contracts covered by the exception to the exclusion).

Thus, if the tenant’s lease includes an agreement to indemnify the landlord from bodily injury or property damage caused by a contractor engaged by the tenant under a work letter, the tenant may be assuming liability for the tort obligations of the contractor and even its subcontractors. For a more detailed discussion of this issue, see Marie A. Moore, Hiding the Pea, Insurer Style: Part Two, Uncovering the Tenant’s Contractual Liability Coverage, 35 Prob. & Prop. 64 (Nov./Dec. 2021).

The contractor and its subcontractors are not parties to the work letter, which means that any provision in the work letter obligating the contractor to carry insurance will not impose any obligations on the contractor. To assure the landlord and tenant that the contractor will provide coverage for the benefit of the party that is not entering into the construction contract with the contractor, the construction contract should obligate the contractor to carry CGL insurance for the benefit of the tenant and landlord as additional insureds. Ideally, the construction contract will also obligate the contractor to include in its contracts with its subcontractors (and those subcontractors to include in their sub-subcontracts) the same obligation to carry CGL insurance and to name the contractor, landlord, and tenant as additional insureds.

Some lower-tier sub-subcontractors may object unless they include in their bids the premium cost of adding these parties as additional insureds to their CGL policies by endorsement.

The contractor’s obligation to carry CGL insurance naming the landlord and tenant as additional insureds does not prevent an injured person from suing either of them for injuries or property damage arising during construction under a work letter claiming the injury or damage was caused by the negligence of the landlord or the tenant. Suppose the tenant’s or landlord’s insurer responds under the exception to the exclusion for contractual liability in the tenant’s CGL policy. In that case,

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that insurer will have a right of subrogation against the contractor or another person that caused the injury or damage unless there is an explicit waiver of the right to assert claims against them in the construction contract with the person causing the injury or damage.

Such a waiver is often called a waiver of subrogation. Some insurance policies automatically allow their insured to waive the right to make a claim (thereby preventing the insurer from asserting a subrogation claim) in a written contract. Sometimes a separate endorsement to the CGL policy will be required. Waivers of subrogation and the advisability of including waivers of CGL claims in construction contracts is a complicated issue beyond this article’s scope.

The Additional Insured The insurer under a CGL policy typically has no duty to defend a party that the named insured is obligated to indemnify, such as a landlord under its lease with the tenant or a landlord under a tenant’s construction contract with the contractor, unless the named insured obtains a separate endorsement to that policy under which the insurer agrees to do so. This type of endorsement is called an additional insured endorsement, and the landlord should always expressly require such an endorsement in the lease with the tenant. But the form of additional insured endorsement often provided under a tenant’s CGL policy to satisfy a lease requirement during the tenant’s occupancy of the premises may not cover construction work performed under a work letter by a contractor engaged by the tenant.

For example, the ISO Form CG 20 11 12 19 Additional Insured – Managers or Lessors of Premises endorsement, frequently provided by a tenant for the benefit of a landlord, explicitly excludes “structural alterations, new construction or demolition operations performed by or on behalf of the [person identified as an additional insured].” If the tenant is to perform the work, the work letter should also require the tenant to require the tenant’s contractor and any

The insurer under a CGL policy typically has no duty to defend a party that the named insured is obligated to indemnify, unless the named insured obtains a separate endorsement to that policy under which the insurer agrees to do so.

subcontractors or sub-subcontractors engaged to perform the work to name the landlord as an additional insured by endorsement to their respective CGL policies. If the landlord hires the contractor, the landlord’s contract with the contractor also needs to explicitly require the contractor to provide CGL insurance naming the landlord as an additional insured, to include this same requirement in its subcontracts, and to require each subcontractor’s contracts with sub-subcontractors to include this same requirement.

Some CGL policies issued to contractors automatically include the landlord or tenant as an additional insured under policy language that expressly covers those persons the contractor must cover as additional insureds under its construction contracts. But this is not always enough. For example, suppose a tenant signs a contract with a contractor to construct leasehold improvements in its space, and the contractor’s CGL policy includes as additional insureds only those with whom the contractor has a contract requiring such parties to be named as additional insureds. In this situation, the landlord will not be covered as an additional insured because the landlord does not have a contract with the contractor. Instead, the contractor should be required to procure a separate additional insured endorsement to the contractor’s CGL policy that explicitly

names the landlord as an additional insured. An ISO Form CG 20 10 12 19 Additional Insured—Owners, Lessees or Contractors—Scheduled Person or Organization endorsement could be specified.

On the other hand, if the additional insured endorsement to the contractor’s CGL policy or the CGL policy language itself includes as additional insureds any person the contractor is obligated by written contract to name as an additional insured (i.e., the language doesn’t require the written contract to be with the contractor), then as long as the contractor’s contract with the tenant obligates the contractor to name the landlord as an additional insured, the landlord will be covered as an additional insured. The ISO Form CG 10 40 12 19 Additional Insured—Owners, Lessees or Contractors—Automatic Status for Other Parties When Required in Written Construction Agreement (Completed Operations) endorsement could be used. Thus, what is required for any given work letter construction project will depend on what the contractor’s CGL policy and any additional insured endorsement say.

There are many different ways in which insurance companies write their CGL policies, so no single form of endorsement will work for all situations. The best advice is to request a copy of the original additional insured endorsement attached to the CGL

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policy and read the language to see who is considered an additional insured. If the additional insureds include only those parties with whom the insured has a contract and the tenant is engaging the contractor to perform the work under the work letter, then the landlord won’t be covered.

Another way a landlord can avoid gaps in coverage like this is to insist that every contractor, subcontractor, and sub-subcontractor entering onto the landlord’s property (regardless of whether they have a contract with the landlord or tenant or a contractor of either of them) sign a separate document with the landlord, sometimes called a right of entry agreement or access agreement. This agreement obligates those parties to name the landlord, its managing agent, and mortgagees as additional insureds under their CGL policies. The landlord must obtain a copy of the additional insured endorsements to ensure that the endorsement’s wording will cover it. Many landlords dislike the administrative burden of reviewing anything other than insurance certificates provided by tenants and contractors. They are even less likely to monitor insurance certificates from subcontractors or

sub-subcontractors. If so, the landlord must either rely on indemnification provisions in the access agreement it has with the various tiers of subcontractors or sub-subcontractors (and hope the indemnitor has sufficient assets to cover any uninsured losses) or rely on the landlord’s own CGL insurance to defend and indemnify it against a claim for bodily injury or property damage by a third party during construction.

Coverage Provided to an Additional Insured The two endorsements noted above are the most common ISO form additional insured endorsements relevant in the construction of leasehold improvements under work letters. These endorsements include limitations on the coverage the landlord or tenant will receive as an additional insured, raising drafting issues.

First, the contractor’s CGL policy will include the landlord or tenant as an additional insured for bodily injury or property damage (i) if caused, in whole or in part, by the contractor’s acts or omissions or for the “acts or omissions of those acting on [the Contractor’s] behalf. . . in the performance of [the Contractor’s] ongoing operations for the

additional insured(s) at the location(s) designated” in the endorsement (in the case of the ISO Form CG 20 10 12 19) or (ii) “if caused, in whole or in part, by [the Contractor’s work] performed for the additional insured” “when [the Contractor] and the [Landlord or Tenant] have agreed in writing in a contract or agreement that [the Landlord or Tenant] be added as an additional insured on [the Contractor’s] policy” (in the case of the ISO Form CG 20 40 12 19).

In other words, neither the landlord nor the tenant is covered for its own acts or omissions, even if it is named as an additional insured in the endorsement form or required to be added as an additional insured in the contract with the contractor. Thus, the coverage is only for the vicarious liability of the landlord or tenant (i.e., situations in which they are held responsible for the acts of a third party, whether that third party is the contractor or one of the contractor’s subcontractors or sub-subcontractors).

Second, each of these form endorsements states: “the insurance afforded to such additional insured only applies to the extent permitted by law” and “the insurance afforded to such additional insured . . . will not be broader than that which you are required by the contract or agreement to provide for such additional insured.” What this means is that the coverage afforded to the landlord or tenant by a contractor or subcontractor’s CGL policy will not apply if the construction contract obligates any of them to assume liability for the landlord’s or tenant’s acts if the law in the state prohibits them from assuming that liability. Likewise, the contractor’s insurance will not apply to the landlord’s or tenant’s vicarious liability arising out of the act of a subcontractor or sub-subcontractor unless the construction contract obligates the contractor to obtain insurance covering the actions of its subcontractors and sub-subcontractors.

Finally, these endorsements also limit the maximum amount paid under the policy to the lesser amount of (i) the insurance required by the contract identified in the endorsement or (ii) the

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amount available under the applicable insurance limits. The endorsement alone will not increase the applicable limits beyond what the work letter requires. An example can illustrate this issue. Suppose a tenant (or a contractor) agrees to indemnify the landlord for all accidents occurring on the premises during the work under a work letter and agrees to maintain $1 million of CGL coverage naming the landlord as an additional insured. Suppose the tenant or the contractor actually maintains $5 million of CGL coverage (whether it is in a primary policy or a combination of a primary policy and an excess or umbrella policy), a worker is seriously injured while on the job, and the landlord is held vicariously liable for $2 million of damages. If either the ISO Form CG 20 10 12 19 or CG 20 40 12 19 additional insured endorsements were part of the CGL policy procured by the tenant or landlord, the insurer will not be required to pay any amount for which the landlord is found liable that exceeds the $1 million coverage limit specified in the contract. The $1 million might also be reduced by earlier claims made by others against the CGL policy during the policy period.

To take advantage of the higher limits that the tenant carries, the landlord needs to include in its lease or work letter insurance provisions a statement that if the tenant carries higher limits coverage than the amounts specified in the lease or work letter, the landlord as an additional insured will be entitled to receive the benefit of these additional limits. If the tenant then engages the contractor to perform the leasehold improvements work, the work letter should contain a similar provision but require the tenant to include the statement in its contract with the contractor.

Below is a sample of such a provision: If [Tenant/Contractor] carries insurance coverage of one or more of the types required hereunder with limits higher than the limits required in this [Lease/Work Letter/Contract], the full amount of the insurance coverage carried by [Tenant/Contractor] will

be available to respond to a covered loss or occurrence, and the coverage afforded to the landlord as loss payee, named insured, or additional insured, as the case may be, under such policy or policies will not be limited by the minimum coverage limits specified in this [Lease/Work Letter/ Contract] but will be deemed increased to the amounts carried by [Tenant/Contractor].

The language limiting the maximum amount that will be recoverable in the ISO additional insured endorsement forms was adopted by ISO in 2013. Thus, it is too early for much case law to provide guidance on how the courts will interpret the endorsements’ limiting language. Likewise, there does not yet appear to be any case law interpreting the type of language suggested here in a lease, work letter, or construction contract where the tenant’s or contractor’s actual CGL policy limits exceeded those specified in the appropriate agreement. This means the most conservative approach for the landlord or tenant to take with a contractor performing work under a work letter is to specify limits of insurance as large as are appropriate given the size of the project (if the contractor has not yet been identified) or (if the contractor has been identified) to determine limits under the CGL policy carried by the contractor and require those same limits in the contract with the contractor, assuming they are sufficient for the scope of the work.

Limits of Liability ISO CGL policy liability limits are provided per occurrence but are subject to two different annual aggregates.

The per-occurrence limit applies to any occurrence that is covered by the policy. The aggregate limits reflect the maximum amount the insurance company must pay during the policy period, regardless of the number of occurrences. In most policies, there is a general aggregate limit applicable to all covered claims except those brought in a products-completed

operations context, and there is a separate aggregate limit applicable only to products-completed operations claims.

Specifying separate liability limits for bodily injury, property damage, and contractual liability is unnecessary— CGL policies have not been written this way for almost 30 years.

Tenants with many locations and contractors involved in many different jobs at different locations may have a general aggregate limit in their CGL policies that applies to all of their locations.

The landlord cannot know if claims arising elsewhere have eroded or exhausted the general aggregate limit, leaving little to no protection for the landlord’s location. To avoid this risk, the landlord can require the full amount of the general aggregate limit to be available to the leased location alone. This can be done through a designated location(s) general aggregate limit (ISO form CG 25 04 05 09) endorsement. If the tenant or contractor cannot provide a designated location(s) general aggregate limit endorsement, a reasonable alternative is to request a higher excess liability limit and require the tenant or contractor to maintain the excess coverage until the final completion of the work.

In almost all cases, the landlord should draft its indemnity provision broadly in the lease or work letter or in its contract with a contractor (where the landlord rather than the tenant is to engage the contractor to perform the work) to include all liability for which the landlord wishes to be covered. Such a broad indemnification provision can be problematic in some jurisdictions. For example, Section 1(a) of the Illinois Landlord and Tenant Act, 765 ILCS 705/1(a), has been interpreted to prohibit a landlord from being indemnified for its own negligence and has also been held to prohibit the landlord from shifting to the tenant the obligation to maintain insurance for a personal injury caused by the landlord’s negligence. See, e.g., Whitledge v. Klein, 810 N.E.2d 303 (Ill. App. Ct. 2004). At least one other Illinois court voided the entire indemnification clause contained in a lease because it was overly broad.

See Economy Mechanical Industries, Inc. v.

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insured. Below is an example of lease or work letter language requiring the tenant to obtain this type of primary and noncontributory coverage:

For the ISO primary coverage endorsement to be effective, there must be a written agreement in which the named insured has agreed that its insurance will be primary and will not seek contributions from other insurance available to the additional insured.

T.J. Higgins Co., 689 N.E.2d 199 (1st Dist.

1997).

Many states also prohibit, limit, or condition the indemnification provisions in construction contracts where the provisions attempt to indemnify the indemnitee-additional insured for its negligence or fault. This means the landlord will not be able to make a claim against the contractor’s CGL policy if the landlord or its agents or employees somehow caused the injury or loss. Even in states where broad indemnification provisions are allowed, the tenant or contractor will want to resist indemnifying the landlord and landlord-related parties from their own negligence as a matter of fairness.

Whose Insurance is Primary?

Suppose a work letter or construction contract designates the tenant’s CGL policy or a contractor’s CGL policy as primary. In that case, the parties want the tenant’s CGL policy (or contractor’s CGL policy) to pay a covered claim up to the available coverage limits without seeking a contribution from the landlord’s CGL policy. This requirement, however, is not part of the ISO CGL policy form. Instead, the form provides that it will be considered excess over any other primary insurance available to the named insured. To avoid a claim by the contractor’s insurer that the

landlord’s or tenant’s CGL policy is primary and the contractor’s insurance for their benefit is excess, another endorsement to the ISO CGL policy will be required. Typically, this is an ISO form CG 20 01 12 19 Primary and Noncontributory—Other Insurance Condition endorsement (ISO primary coverage endorsement). When this endorsement is included in a tenant’s (or contractor’s) CGL Policy, the coverage provided to the landlord (as an additional insured) under the tenant’s (or contractor’s) CGL policy becomes primary over the coverage the landlord maintains for itself.

A CGL policy that includes an ISO primary coverage endorsement, however, is not primary to other coverage naming the landlord as an additional insured, such as coverage provided by other tenants in the landlord’s building under their CGL policies.

For the ISO primary coverage endorsement to be effective, there must be a written agreement in which the named insured has agreed that its insurance will be primary and will not seek contributions from other insurance available to the additional insured.

Simply including a requirement that the tenant’s (or contractor’s) CGL insurance be primary in the lease or work letter will not suffice. There also needs to be an agreement that the insurer will not seek contribution from the additional

It is the intent of the parties to this [Lease/Work Letter] that all insurance coverage that the tenant is required to maintain in this [Lease/Work Letter] will be primary to and that this insurance will not seek contribution from any other insurance held by [Landlord Parties] and that [Landlord Parties’] insurance will be excess, secondary, and non-contributing. The general liability and excess umbrella liability policies will be so endorsed.

Below is an example of a provision for the construction contract (regardless of whether the tenant or the landlord engages the contractor to perform the work under a work letter) requiring the contractor to obtain the primary and noncontributory coverage afforded under the ISO primary coverage endorsement: It is the intent of the parties to this [construction contract] that all insurance coverage that the contractor is required to maintain under this contract will be primary to and that this insurance will not seek contribution from any other insurance held by [the Tenant Parties or the Landlord Parties] and that the [Tenant Parties’ or Landlord Parties’] insurance will be excess, secondary and non-contributing.

The general liability and excess/ umbrella liability policies procured by the contractor under this policy will be endorsed.

Similar language must be included in the contractor’s contracts with its subcontractors for the subcontractor’s insurance policies to be primary for the insurance coverages obtained by the contractor, the landlord, or the tenant. Including this language in either the contractor’s contract or

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the subcontracts will not be effective, however, unless the contractor’s and subcontractors’ policies include such coverage either in the policies themselves or by an endorsement like the ISO primary coverage endorsement.

The landlord or tenant must review the evidence provided by the contractor and its subcontractors regarding their insurance coverage.

Evidence of CGL Insurance When a party relies on CGL insurance being maintained by another party, the party depending on the coverage must obtain proof that this coverage is in place, in the correct amounts, and with the correct coverage and endorsements.

In most leases (and work letters), the landlord requires the tenant or contractor to produce certificates of insurance with respect to the CGL insurance they carry. These one-page forms are easy to administer, but ACORD promulgates the most commonly used forms for these certificates or evidence. ACORD is the Association for Cooperative Operations Research and Development, a nonprofit that serves the insurance industry by, among other things, developing standard forms. Its members are primarily insurance companies, so the ACORD forms reflect the interests of ACORD’s insurance company members, and those insurance companies do not want to be bound by a one-page form filled out by a clerk at an insurance broker’s office.

Unfortunately, landlords and tenants cannot rely on ACORD certificates of liability insurance as evidence or proof of CGL insurance. They are not proof or evidence of anything. The form states on its face that it is not binding on the insurer. The insurers have taken the position that a one-page form cannot override a policy that is composed of many pages of coverages and limitations on coverages. See W. Rodney Clement Jr., Is a Certificate of Insurance a Worthless Document?, 24 Prob. & Prop. 46 (May/June 2010). The most current version of the ACORD form issued in 2016 no longer provides that the insurer will give—or endeavor to give —the certificate holder notice of

coverage cancellation. If the certificate holder wants this notice, it needs to obtain an endorsement of the insured’s policy in which the insurer commits to giving this notice. In addition, the certificate holder is not automatically an additional insured. Thus, the party that wishes to be an additional insured under another person’s CGL policy or wants another party’s CGL insurance to be primary must obtain a copy of the actual endorsements included in the CGL policy.

Moreover, language in the work letter that merely requires the tenant or contractor to provide a certificate of insurance issued to the landlord is insufficient. The work letter or construction contract between the parties must specify the type of insurance the parties are to carry and must identify the person or persons the other party must name as additional insureds under the policies. See Old Republic Ins. Co. v. Gilbane Bldg. Co., 2014 Ill. App.123430 (1st Dist. 2014). In the Gilbane case, a general contractor sought a defense and indemnity from a subcontractor’s insurer in a lawsuit filed by an employee of another subcontractor injured on a construction project.

The insurer filed a declaratory judgment action seeking a determination it did not have to defend or indemnify the contractor because the insurance specifications in the subcontractor’s contract only required the subcontractor to name the contractor as an additional insured on certificates of insurance. The certificate provided by the subcontractor named the contractor as the certificate holder and stated that the contractor, the owner of the property on which the injury occurred, and another third party were included as additional insureds “per the terms and conditions of the contract.” The contract language, however, did not require the subcontractor to add the contractor as an additional insured on its CGL policy. Based on this unambiguous contractual language, the court held the contractor was not entitled to be defended or indemnified when the subcontractor’s CGL policy did not name the contractor as an additional

insured. The contractual obligation was satisfied when the contractor received a certificate of insurance stating it was an additional insured.

The best approach when relying on the insurance that another party is maintaining under a work letter is to include language in the work letter or other contract (such as a construction contract with the contractor performing the work) requiring that the party maintaining the CGL coverage provide a certified copy of the policy itself or at least the declarations pages, the schedule of forms and endorsements comprising the policy, and copies of all endorsements that are needed to evidence the required coverage. The party relying on the coverage must review the documents provided to ensure the required coverage is included in the relevant CGL policy and that there are no other endorsements to that CGL policy that diminish the required coverage and to be sure the CGL policy has not expired.

Conclusion Understanding the appropriate types of insurance that should be procured and maintained during the construction of leasehold improvements under a work letter is no easy task. CGL insurance (and property insurance or builders risk insurance, to be discussed in the upcoming Part Two of this article) are not the only types of insurance that may be required, but those other types are beyond the scope of this article.

When insurance is required, the parties must also ensure all the necessary insurance is in place before construction commences. Landlords or tenants who infrequently undertake the construction of leasehold improvements should consult an insurance agent, broker, consultant, or provider who is experienced in dealing with construction projects and who will know what questions need to be asked for the landlord or tenant and contractor to be assured (as best they can) that the right coverages for the right amounts and for the right period of time have been procured. n

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By Nathan G. Osborn

Nathan G. Osborn is an equity shareholder with Montgomery Little & Soran, P.C. in Greenwood Village, Colorado.

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Getty Images

Using LLCs to T Purchase and Own Rental Property

he number of people owning rental properties has been on the rise. With an increasing demand for rental properties, especially residential properties in urban areas, more people see the advantages of owning and managing rental properties. Similarly, with the soaring costs of homes in the United States, just about anyone with the means to do so is getting into the market of renting real estate to others. According to Redfin, in 2022, only 21 percent of homes for sale were “affordable,” meaning that the “monthly mortgage payment would be no more than 30 percent of the county’s median income.” In light of these economic trends, my clients are more inclined to invest in real estate and take on the role of landlord.

Owning rental properties comes with risk, however, so many people turn to limited liability companies (LLCs) to protect

their personal assets and reduce their potential liability. The insulation from personal liability risk, ease of administration, and potential tax benefits make ownership of real estate investment property through an LLC a desirable option.

This article will explore the increasing trend of owning rental properties and the advantages of owning rental properties in LLCs, and explain why owning a rental property in an LLC is an intelligent business decision that attorneys should frequently recommend to their clients.

Increasing Demand for Rental Properties The rising demand for rental properties is one of the primary reasons for the increase in rental property ownership.

With the increasing cost of homeownership, many people are choosing to rent instead of buy. This shift has led to a surge in demand for rental properties, especially in urban areas, where housing is typically expensive and in short supply. The increase in remote work also has led to a growing number of renters looking for affordable housing in which to live and work (or, out of which to work). With the need for rental properties growing, many people have contacted real estate attorneys for advice about their new rental property businesses.

Initial Step—Understanding the Contemplated Business When an attorney is helping a client determine the best business structure, the attorney should ask several key questions. First, the attorney should inquire about a client’s business goals and plans for growth because different types of structures may be more suitable for businesses with different plans and goals. For example, a client who wants to purchase a single property is ideal for an LLC. In contrast, a multi-jurisdictional real property investment company with plans for significant growth might prefer a corporate structure. The attorney should also ask questions about the client’s personal financial situation. Renters are

a liability, and the client should shield themself from liability to the extent possible. Indeed, clients with significant assets should ensure that a slip-andfall judgment from their rental property does not impair their personal wealth.

LLCs can protect a real estate client.

The attorney should ask about the client’s tax situation and whether the client has preferences regarding tax treatment. For example, a client may be operating at a loss initially, and the client may want to avoid taking the monetary losses personally. In this situation, a corporate structure may be preferable. A landlord will need to pay taxes on rental profits, and determining how these profits are taxed is critical when selecting the best business structure. Relatedly, the attorney should determine whether the client has foreign investors because foreign-based owners are not legally permitted to hold stock in S corporations. Another helpful initial point of information is where the client intends to operate the rental business. Indeed, for convenience and efficiency, clients should consider establishing an LLC in the state where the real property exists because the client will need to file a tax return there.

After asking the introductory questions and receiving answers, the attorney likely will advise clients to put their rental properties in an LLC and incorporate the LLC in the state where the real property is located. Using LLCs for ownership is an effective way to protect the client’s personal assets from potential liability and a practical way to streamline your client’s rental property business.

Liability Protection Owning rental properties can be a lucrative investment but it comes with potential liabilities. Landlords can be held liable for accidents or injuries on their properties, which can put their personal assets at risk. This is where LLCs come in. When real property is owned by an LLC, the owner’s risk exposure is insulated by the protection of the company, leaving only the LLC’s assets subject to creditors (as opposed to the owner’s personal assets).

In short, this means that the members’ personal assets are protected from the liabilities of the LLC. In the event of a lawsuit against the LLC, the members are not personally responsible for the debts or obligations of the business.

Instead, the liability is limited to LLC assets that, in the case of a real estate LLC, would likely include the LLC bank account and the real property owned by the LLC. This protection is one of the main advantages of forming an LLC; the business structure can shield members’ personal assets from legal claims incurred by the real estate company.

Notwithstanding the reduction in exposure that an LLC provides, LLC liability protection is not absolute. There are certain events in which members’ personal assets still could be at risk. For example, the personal assets of an LLC’s members could be at risk when a court “pierces the corporate veil” and holds members of an LLC personally liable for the obligations of the real estate business. “Piercing the corporate veil” can occur if the LLC is perpetrating fraud or its members have co-mingled personal and business funds and affairs. Lenders also may require personal guarantees before funding a loan for the business.

This means that if the real estate business cannot repay a loan, the lender may seek repayment from the LLC members personally.

Similarly, members of an LLC could be personally liable for unpaid taxes, especially if the members engaged in tax evasion. LLC protection might also be circumvented if, for example, a sole owner member files for bankruptcy.. In the Colorado case In re Ashley Albright, 21 B.R. 538 (Bankr. D. Colo. 2003), the debtor was an individual and a sole member of an LLC. The LLC did not petition for bankruptcy. During the bankruptcy proceeding, a trustee took over the LLC, and the court found that the trustee held all rights to the governance of the LLC (including rights to sell real estate to pay off creditors) over the debtor’s objection. Here, despite the perceived protections of the LLC, the trustee was still able to, essentially, collect a corporate debt from an individual.

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While certain specific events could place member assets at risk, members can still help shield their personal assets from most types of business-related liability by forming an LLC and owning real estate in the LLC structure .

Tax Advantages Owning real estate in an LLC can offer several tax advantages for the LLC members. The most significant tax advantage of an LLC is the owner’s ability to have pass-through taxation. C corporations are subject to double taxation—once at the corporate level and then again when dividends are distributed to shareholders. Income and capital gains from a real estate LLC pass through directly to the owner, who has to pay taxes only as an individual. Hence, real estate LLCs can avoid double taxation on rental income and appreciation in value. Also, rental income is considered passive income, subject to a lower tax rate than ordinary income. Multimember LLCs also enjoy pass-through taxation because the LLC passes profits and losses through to its members, who report and pay taxes on only their portion of the profits and losses.

Real estate investors who own property in an LLC may make numerous tax deductions as part of their real estate business, including mortgage interest, insurance, property taxes, maintenance costs, property management fees, advertising expenses, legal fees, travel and mileage expenses, and software, tools, or other real estate support expenses.

These expense deductions can help reduce the taxable income of the LLC members. LLCs also have great flexibility in how to allocate revenue. Indeed, through the operating agreement, members can allocate income to minimize their personal tax liability.

The LLC member can use depreciation to reduce taxes. The IRS sets a lifespan of a residential structure at 27.5 years. To that end, owners can deduct 1/27.5 of their property’s building value each year. The member can also depreciate capital improvements to the property.

Likewise, if the operating agreement of the LLC correctly specifies how the member interest is conveyed upon death, when the client dies the property will pass to their heirs. Hence, the first $12.92 million of the client’s estate is tax-free. Accordingly, an LLC member’s heirs typically can sell the property and keep the proceeds tax-free.

A client who owns property in an LLC should take advantage of like-kind exchanges, meaning an investment property exchanged for other investment property of “like-kind.” The IRS does not recognize like-kind exchanges as a gain or loss under the Revenue Code Section 1031. Properties are “likekind” if they are of the same nature or character, even if they differ in grade or quality. Real property is generally “like-kind,” though real property in the United States is not “like-kind” to international real property.

When selling LLC real estate as part of a 1031 exchange, the proceeds from the sale must go to a qualified intermediary rather than to the seller. The qualified intermediary holds the funds until the funds can be transferred to the seller for the replacement property.

A 1031 exchange of an LLC property also allows the members to take advantage of depreciation. Depreciation is the percentage of the cost of an investment property that the LLC can write off , recognizing the effects of wear and tear.

When a property is sold, capital gains taxes are calculated on a “net-adjusted basis,” which includes the original purchase price plus capital improvements minus depreciation. Section 1031 allows the client to “re-set” depreciation because, if a property sells for more than its depreciated value, the client may need to recapture the depreciation.

The amount of depreciation will be included in the client’s taxable income.

Because the amount of depreciation increases over time, the client can avoid a significant increase in taxable income via recapture if the LLC conducts a 1031 exchange. These tax savings, once again, would be passed along to the individual members.

Operating Agreements and the LLC A limited liability operating agreement is a legal document that outlines the ownership structure, management, and operating procedures of an LLC. Under applicable law, the members typically have great flexibility when deciding upon the terms of the operating agreement.

Indeed, one of the great advantages of a real estate LLC is the immense amount of freedom of contract.

By way of example, when delegating management responsibilities, LLCs have greater flexibility than most other business entities. Indeed, through an operating agreement, an LLC can easily be managed by owners or third parties—whereas corporations must have officers and directors. There is also flexibility in the distribution of profits, unlike in a corporation, which requires pro rata distribution to the shareholders. The LLC provides an opportunity to reward someone for sweat equity, such as real estate promoters who do not have investment cash. The LLC can also be a great estate planning device for family-owned property. For example, the owner of a family ranch could instead have an LLC own the ranch, and the LLC could eventually pass along to a member’s children in a pro-rata fashion.

Capital Contribution Provisions Essential provisions in a real estaterelated LLC operating agreement include carefully drafted capital contribution provisions, among others.

Capital contributions are the money and assets given to the business by members. Members are often required to contribute capital to an LLC. The operating agreement should set forth the amount of required capital contributions, if any, and the timing of payments. Members should set forth which capital contributions will be used and which will be paid back. Operating agreements often provide that members contributing extra amounts will get a “preferred return.” This “preferred return” can be distributed before any

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pro-rata distribution to non-contributing members.

The client should also address provisions that deal with situations in which the LLC needs future capital in addition to the initial capital contributions, as this is a common situation in real estate deals. One option is for the LLC to obtain a loan, so clients should set forth the loan application process in the operating agreement. The operating agreement should outline requirements, such as who has the right to obtain a loan, the loan amount, and for what purposes a loan may be permitted.

An operating agreement can require an additional capital contribution if, for example, amounts are needed to pay construction loans, to eliminate safety hazards via alterations or repairs on the property, or to pay off mechanic’s liens.

One way to make capital contributions mandatory is to allow for a “preferred return” on the required contributions.

An operating agreement should outline how to pay construction-related fees if the client’s real estate venture involves construction. If the cash flow cannot cover the construction costs, the operating agreement must make clear whether the LLC must pay these costs through a capital contribution or a new loan or by decreasing the members’ distributions to assist with the construction payments. Mandatory additional capital contributions are especially important if the investment is premised on improvements.

An operating agreement also may make the additional capital contributions non-mandatory.

Usually, the manager decides whether the LLC needs an additional capital contribution. If there is more than one manager, the operating agreement should provide for dispute resolution when the managers disagree. This dispute resolution should provide quick resolution because additional capital calls need to be made and agreed upon quickly. A good idea is to assign a third-party arbiter who can decide quickly for the LLC. The operating agreement should provide for penalties in the event a member cannot make a mandatory

additional capital contribution. Initially, the paying members could pay the non-paying member’s share. Then, the LLC could make a loan to the nonpaying member at a high interest rate. The loan can be satisfied by the next round of member distributions.

Another option is to dilute the interest of the non-paying member then to recalculate each member’s share based on the total capital contributed previously and under the capital call.

Crafting Distribution Provisions to Share Real Estate Profits The goal of forming an LLC is for it to become profitable. A return can be made on this investment via a salary for employees of the LLC, capital gains from a sale, or, very frequently, from distributions. Distribution provisions should be outlined in the operating agreement. The LLC can distribute pro rata by capital invested, by membership interest, or by a more complicated formula. In a real estate deal, equity investors and managers may receive distributions based on the performance of the LLC. It is common to have project promoters receive large distributions if the project succeeds. These distributions encourage “sweat equity.”

“Waterfall” distributions are standard in real estate deals—a formula where there are tiered distributions. The first people get paid, then the distributions pour over into the second level, and so on. A minority member would want mandatory distributions on a set basis (i.e., quarterly). Sometimes, however, it is better for the real estate LLC if the timing of distributions is discretionary (i.e., when the client has cash available to distribute). The client can cause the manager to make discretionary distributions, which allows for distributions when the LLC has cash flow instead of mandating distributions when there is little money to distribute.

Member-Managed or ManagerManaged?

The operating agreement should address whether the entity is member-managed or manager-managed.

As described, member-managed LLCs

are managed by their members. All members typically are involved in the operation and management of the business. All members then can also bind the entity and make decisions on behalf of the entity, often without a vote (subject to the terms of the operating agreement).

Manager-managed LLCs grant the power to make decisions to an appointed manager (sometimes a third party). The manager is defined by agreement and typically set forth within the operating agreement. A manager can be another entity. The applicable law often will default the entity to being member-managed if the client does not appoint a manager or the operating agreement is silent on the issue.

A member-managed LLC is best if all the members want to be involved in the decision-making process, the client does not have an operating agreement, or there are few members. A managermanaged LLC is generally more suitable if the client wants only specific individuals making decisions, some members want to be passive owners, some members do not have the requisite expertise, or there are so many members that the management would become too complicated.

An advantage of owning rental properties in LLCs is that it can simplify the management of the properties. An LLC can have multiple members, each with distinct property management responsibilities. This can help distribute the workload and reduce the stress and time commitment of managing rental properties.

Conclusion Rental property ownership is an increasingly popular investment choice, driven by the rising demand for rental properties. Owning rental properties in LLCs offers numerous advantages and risk protections, such as liability protection, tax benefits, and, if provided by a well-written operating agreement, a flexible management vehicle. Indeed, the LLC is a good idea for anyone considering owner rental properties and should be recommended to real estate clients accordingly. n

Published in Probate & Property, Volume 37, No 5 © 2023 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.

September/October 2023 57

Tax Incentives for Conservation Easements in Headlines Lately

W

hy have conservation easements been in the headlines so much lately? What property rights do they create, and what tax benefits can be obtained? Creating a conservation easement is one of the strategies available under the Internal Revenue Code (Code) for estate and income tax planning purposes. Conservation easements are a niche tool not widely used by general estate planning practices. This article sheds light on the conservation easement mechanism for an estate planner and the issues related to conservation easements addressed in recent years by the courts, the legislature, and the Internal Revenue Service (IRS).

Tax Notes (Apr. 10, 2023). Some experts have been advocating for the IRS to address this backlog in a settlement program; a limited one had been rolled out by the IRS Office of Chief Counsel in 2020 with little success (IR-2020-130, CC-2021-001).

The largest offenders pursued by the IRS have been syndicated conservation easement promoters facilitating large fund partnerships to buy land and donate rights to develop it to generate substantial tax deductions. In 2017, the IRS issued Notice 2017-10 (later modified by Notice 2017-29), designating a syndicated conservation easement deal as a listed reportable transaction subject to penalties under Code § 6662A. In 2022, however, the Sixth Circuit (Mann Construction Inc. v. U.S., 27 F. 4th 1138 (6th Cir. 2022)) and the Tax Court (Green Valley Investors LLC et al. v. Comm’r, 159 T.C. No. 5 (2022)) held that the IRS lacks authority to identify listed transactions by way of a notice for failure to comply with the notice and comment requirements of the Administrative Procedure (APA). This led to the issuance on December 6, 2022, of proposed regulations (REG106134-22) requiring disclosure of syndicated conservation easement deals as potential listed transactions under threat of perjury.

In March 2023, a settlement was reached in the amount of $6 million between the IRS and EcoVest Capital Inc. in a conservation easement promoter injunction and disgorgement lawsuit. See Kristen A. Parillo, EcoVest Paid $6 Million to Settle DOJ Easement Promoter Suit, Tax Notes (Apr. 10, 2023). The real estate company promoted conservation easement transactions

Summary of Recent Developments Conservation easements have been, for some time, an audit target for the IRS. Besides challenging the valuation of the conservation easement deduction, more recently the IRS has been disallowing the deduction based on the failure to meet the requirement that the easement exist in perpetuity (as illustrated by several recent court decisions discussed below). There is an estimated backlog of over 750 docketed conservation easement cases in the Tax Court. See Armando Gomez and Roland Barral, “It’s High Time to Clear Out the Tax Court’s Easement Backlog,” Juliya L. Ismailov is an associate at Sullivan & Worcester LLP in New York, New York. She is a member of the ABA RPTE’s Business Planning and Litigation, Ethics & Malpractice Groups.

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Getty Images

By Juliya L. Ismailov

to thousands of customers and facilitated some 138 such transactions, earning an estimated $131 million in gross receipts, resulting in more than $2 billion in deductions based on inflated appraisal values; valuations were conducted as if the vacant underlying property had already been developed.

On April 10, 2023, Notice 2023-30 was issued by the IRS, providing model language for (i) the extinguishment clause under the safe harbor, closely tracking the proceeds regulation, Treas. Reg. § 1.170A-14(g)(6)(ii), and requiring a judicial determination that the easement is extinguished and that the donee is guaranteed its proportionate share of proceeds to be used by the donee consistently with the original conservation purposes, and (ii) the boundary adjustment clause, requiring judicial proceeding to resolve any boundary disputes. The notice also outlines the process for donors to make conforming changes to eligible easement deeds by July 24, 2023.

Characteristics and Purposes of Conservation Easements A conservation easement is created by a landowner (as grantor) entering into a contract with a qualified private land conservation organization (known as a land trust) or municipal, county, state, tribal, or federal government (as grantee). The grantee is granted the power to constrain private property rights in a specific area of land for conservation purposes, which right is recorded in a deed and which the grantee then monitors and enforces in perpetuity. The grantor continues to own the land, may use it for purposes that do not impair its conservation value, and may sell or bequeath it upon death, subject to the conservation easement, which runs with the land as to present and future owners, in perpetuity.

Real estate developers often grant conservation easements to alleviate environmental impact and obtain land use, zoning, and other relevant permits. As a result, whether the developer is entitled to a charitable deduction for tax purposes would involve an analysis of charitable intent and the relative benefits the developer receives in return. See, e.g., Emanouil v.

Comm’r, T.C. Memo. 2020-120.

The purposes of a conservation easement depend on the type of land, the goals of the grantee, and the landowner’s needs. Categories of conservation (as illustrated in the facts of the recent caselaw discussed below) include prevention of development, fostering of agriculture, preservation of grasslands, wetlands, and forestland, improvement of water quality, fostering wildlife habitat and migration paths, and preservation of open spaces and scenic vistas.

The National Conservation Easement Database (NCED) is a database of conservation easements across the United States.

According to the NCED website’s front page (https://www.conservationeasement. us/), the current number of easements tracked by the NCED is 201,525, conserving over 33.5 million acres in the United States (roughly 1.4 percent of the country’s surface area).

The downside of conservation easements is that they reduce the value of land by 35 to 65 percent by constraining its development potential. See James Olmsted, Conservation Easements: New Perspectives in an Evolving World, Law and Contemporary Problems, 74:4 (Fall 2011).

In addition, there is a risk that a conservation easement may be extinguished in the future by eminent domain or tax foreclosure or as result of insurance claims.

(The treatment and effect of an easement’s judicial extinguishment under charitable deduction rules are discussed below in the summary of recent court decisions.)

Tax Benefits Over the years, federal and state legislation has supported the private sector’s creation of conservation easements.

Such laws facilitate both the sale of conservation easements by landowners to land trusts and governmental entities and the donation of conservation easements in return for federal and state income and estate tax reductions.

Federal Income Tax Deduction The federal income tax deduction for conservation easements is available under Code § 170(a) and (h).

The deduction for the conservation easement is equal to the value of the donation on the contribution date,

reduced by the fair market value of any consideration received by the taxpayer.

See Treas. Reg. § 1.170A-1(c)(1), (h)(1) and (2). The value of the donation, as determined by a qualified appraiser, generally equals the difference between the fair market values of the property before and after the easement takes effect. See Treas. Reg. § 1.170A-14(h)(3) (i).

To qualify for this income tax deduction under Code § 170(h)(1), (2), (3), and (4), Treas. Reg. 1.170A-14(a), (b)(2), (c)(1), and (d) provide that the easement must: a) be perpetual; b) be held by a qualified governmental or non-profit organization; and, c) serve a valid “conservation purpose” by having an appreciable natural, scenic, historical, recreational, or open space value.

Among other requirements, such as substantiation of the easement’s value, if the public benefit of the easement is not significant or is exceeded by the benefit received from the donation by the donor, the charitable contribution deduction will be disallowed. See Code § 170(h)(4)(A)(iii); Treas. Reg. § 1.170A-14(d)(4)(iv), (v), (vi), and (h)(3)(i) and (ii).

Under Code § 170(b)(1)(E)(i), conservation easement donors can deduct the value of their gift at the rate of 50 percent of their adjusted gross income (AGI) per year. Under Code § 170(b)(1)(E)(iv), landowners with 50 percent or more of their income derived from agriculture can deduct the donation at a rate of 100 percent of their AGI. Under Code § 170(b) (1)(E)(ii), any amount of the donation remaining after the first year could be carried forward for up to 15 additional years.

Federal Estate Tax Deduction Upon a landowner’s death, estate taxes attributable to large tracts of land create a challenge for the family to keep the land intact, particularly without engaging in its development. A conservation easement can ease this problem as follows: (i) reduce the value of the overall estate for estate tax purposes by the value of eliminated development rights; (ii) further exclude up to 40 percent of the land value (up to $500,000 maximum) under Code § 2031(c); and (iii) on property that

Published in Probate & Property, Volume 37, No 5 © 2023 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.

September/October 2023 59

The TOT Property Holdings court emphasized the difference between clauses respected for tax purposes that merely assist in interpreting dispositive provisions in an agreement and those that impose a condition subsequent, which are not so respected.

was not already subject to a conservation easement, elect to donate a conservation easement after the landowner’s death under Code § 2055(f).

State Income Tax Credit Many states have also enacted tax benefits to encourage conservation easements, usually through a tax credit. Some states, including Colorado and Virginia, have enacted laws allowing the transfer of state conservation easement tax credits, subject to restrictions. See Ronald A. Levitt, ABA Section of Taxation, “Planning for and Defending Conservation Easements in an Adverse IRS Environment” (Jan. 2020).

Eleventh Circuit Decisions on Extinguishment Proceeds and Protected-in-Perpetuity Regulation Below is a survey of the recent appellate and Tax Court decisions illustrating highfrequency issues involving conservation easements.

In TOT Property Holdings, LLC v.

Comm’r, 1 F. 4th 1354 (11th Cir. 2021), the court rejected a savings clause included in the conservation deed as an impermissible “condition subsequent,” therefore failing the “protected in perpetuity” requirement of Code § 170(h) (5)(A). The clause was included in the conservation easement deed granted by TOT Property Holdings, LLC to Foothills Land Conservancy, encumbering nearly all of TOT Holding’s approximately 652 acres of rural, undeveloped real estate in Van Buren County, Tennessee.

The deed stated that upon termination or extinguishment of the easement (as determined by judicial proceeding

if the continued use of the property for conservation purposes becomes impossible or impractical (Treas. Reg. 1.170A-14(g)(6)(i)) as a result of a sale of property, eminent domain condemnation or an insurance claim), the grantee would receive its proportionate share of the proceeds resulting from such termination or extinguishment, (i) reduced by the increase in value of the easement after the easement was granted attributable to improvements or (ii) as “determined [by a subsequent IRS or court determination] in accordance with Section 9.2 or [Treas. Reg.] Section 1.170A-14, if different” (i.e., savings clause). The court emphasized the difference between clauses respected for tax purposes that merely assist in interpreting dispositive provisions in an agreement and those that impose a condition subsequent, which are not so respected.

In Hewitt v. Commissioner, 21 F. 4th 1336 (11th Cir. 2021), rev’d and rem’g T.C. Memo. 2020-89, the court invalidated Treas. Reg. § 1.170A-14, which addresses the “protected-in-perpetuity” requirement in Code § 170(h)(5). The Court ruled that the prohibition in the regulation against reducing the portion of extinguishment proceeds allocable to the easement grantee by the value of the post-donation improvements made by the grantor is arbitrary and capricious and violates the Administrative Procedures Act (APA), which requires the Treasury to “consider and respond to significant comments received during the period for public comment,” such as that made by New York Landmarks Conservancy, among others, that

the extinguishment proceeds regulation “could result in an unfair loss to the property owner and a corresponding windfall for the donee.”

The Eleventh Circuit, in overturning the Tax Court decision, contravened the Tax Court decision from the Sixth Circuit, which upheld the regulation and was subsequently affirmed by the Sixth Circuit in 2022 in Oakbrook Land Holdings, LLC v. Comm’r, 28 F. 4th 700 (6th Cir. 2022).

This decision created a split in the circuits between the Sixth Circuit (Oakbrook, discussed below) and the Eleventh Circuit (Hewitt). The petition for a writ of certiorari to the Supreme Court by the IRS in Oakbrook requesting to review the decision was denied; the IRS had not made a similar petition in Hewitt.

In Glade Creek Partners LLC, 21 F.4th 1336 (11th Cir. 2022), vac’g and rem’g T.C. Memo. 2020-148, the court remanded the case back to the Tax Court to consider IRS arguments for invalidating the easement deduction besides the argument that the easement failed Code § 170(h)(5)(A)’s inperpetuity requirement under Treas. Reg. § 1.170A-14(g)(6) because this regulation had been invalidated by Hewitt in 2021 (discussed above).

Tax Court Decisions on Extinguishment Proceeds and Protected-in-Perpetuity Regulation Appealable to Eleventh Circuit In Hancock County Land Acquisitions LLC v. Commissioner, No. 12385-20 (Tax Ct. Aug. 17, 2022), the court denied the IRS’s motion for summary judgment where the easement deed contained extinguishment proceeds provisions that the IRS claimed violated Treas. Reg. § 1.170A-14(g)(6). The easement involved over 236.12 acres of land in Mississippi near the Stennis Space Center, NASA’s rocket propulsion test facility. The deed provided that the donor could make certain future improvements to the easement property, including access roads, fences, rustic structures within the confines of the landscape’s natural and scenic features, and hunting stations, if they minimized property damage and preserved the value of the wildlife habitat.

In denying summary judgment, the Court granted the taxpayer a chance to establish

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that such improvements would be of negligible value and would not materially impact the division of proceeds under Treas. Reg. 1.170A-14(g)(6). This case would be appealable to the Eleventh Circuit, where in 2021, Hewitt invalidated the extinguishment proceeds regulation.

In Briarcreek Preserve, LLC v. Comm’r, T.C. Dkt. No. 1547-18 (Apr. 4, 2022), the court granted partial summary judgment in IRS’s favor in the denial of charitable deduction where the easement deed reduced extinguishment proceeds allocable to the donee by the value of improvements. The court chose not to rule on the validity of the extinguishment proceeds regulation because the case is appealable to the Eleventh Circuit, which held that this regulation is invalid. This case involved a conservation easement of over 227.46 acres of woodland in Georgia, with reserved rights to conduct commercial agricultural and forestry activities, make some improvements, and construct buildings, including single-family residential dwellings and appurtenant roads and utilities.

Sixth Circuit Decision on Extinguishment Proceeds and Protected in Perpetuity Regulation In Oakbrook Land Holdings, LLC v. Comm’r, 28 F. 4th 700 (6th Cir. 2022), aff ’g 154 T.C. 180 (2020), the court took the opposite position from the Eleventh Circuit in Hewitt, discussed above, on the same legal issue. Oakbrook Land Holdings, LLC gave a conservation easement to the Southeast Regional Land Conservancy on 106 acres of its 143-acre tract of land in Chattanooga, Tennessee (bought just over one year earlier for $1.7 million), retaining the rest for future development, and claiming a $9.5 million charitable contribution deduction. The IRS disallowed the deduction because Treas. Reg. § 1.170A-14(g)(6) requires that proceeds division in the event of the easement extinguishment be based on the relative values of the two shares on the date of the gift, with no adjustments for improvements. Unlike the majority in Hewitt, the majority in Oakbrook held that most of the information addressing public comment, as required by the APA, was present in the legislative history and the notice

of proposed rulemaking. The court held that the decision to favor the charitable donee over the donor for post-contribution improvements was consistent with the primary purposes of Code § 170(h)(5) (A). The petition for review of the decision by the Supreme Court was denied on January 9, 2023.

Tax Court Decision on Extinguishment Proceeds Valuation In Corning Place Ohio, LLC v. Comm’r, T.C. Memo. 2022-12, the court partially denied the IRS’s summary judgment motion and found that a façade easement in a 19thcentury historic building in Cleveland, Ohio, did not fail to satisfy the perpetuity requirement of Code § 170(h). The Garfield Building, designed by noted architect Henry Ives Cobb and built by President James A. Garfield’s two sons on John D. Rockefeller’s land, was bought for $6 million and converted from vacant office space to residential apartments and has been on the National Register of Historic Places for 20 years. A façade easement was donated to a qualified charity, with a $22.6 million donation deduction claimed by the owner. The court disagreed with the IRS that the extinguishment proceeds clause in the conservation deed was invalid because it allocated extinguishment proceeds based on the values of the property and the easement determined for income tax purposes. Such valuations did not depend on whether the conservation easement deduction was allowed by the IRS. Tax Court Decisions on Effect on Conservation Purpose of Grantee’s Right to Consent to Grantor’s Exercise of Reserved Rights In Pickens Decorative Stone, LLC v. Comm’r, T.C. Memo. 2022-22, the court denied the IRS’s motion for summary judgment on the issue of whether the consent requirements in the deed invalidated the charitable deduction. The property in Georgia subject to the easement was purchased for $490,010 and subsequently contributed to a qualifying charity, claiming a $24.7 million income tax deduction.

The deed reserved to the donor the right

to engage in forestry and recreational activities and to construct barns, sheds, and facilities “for the generation of renewable electrical power,” exercised in a manner consistent with the conservation purposes and with the prior consent of the charity. In denying summary judgment motion by the IRS, the court explained it would need to consider the donee’s “internal procedures and past practice” to determine whether it was likely to defend the easement’s conservation purposes.

In Hickory Equestrian, LLC v Comm’r, T.C. Dkt. No. 347-21 (Feb. 8, 2022), the court denied the motion for summary judgment by the IRS based on the finding that the mere existence of a deemedconsent provision in the deed did not invalidate the charitable contribution. The easement in Georgia involved the preservation of “open space” and a “natural habitat of fish [and] wildlife,” with a claim of a $6.3 million conservation easement deduction on property purchased for $112,000. In addition to challenging the taxpayer’s failure to report basis information allegedly in reliance on professional advice, the IRS challenged the donor’s reserved right to engage in hunting, fishing, and horseback riding on the land, to build “hunting or observation stands,” bird houses, trails, and signage, to maintain trails, dredge or channel watercourses, to remove damaged trees that blocked trails or threatened injury, and to build a shed to store maintenance equipment.

The deed contained a written consent requirement for the exercise of any of such reserved rights that may impair the conservation easement, with the donee’s failure to respond within a stated period stipulating the donee’s constructive consent.

Conclusion Like other charitable deductions available under the Code to promote benevolent causes, conservation easement deductions have been subject to IRS scrutiny because of potential abuse. But a conservation easement granted, valued, and reported accurately in good faith continues to be a valid tax planning tool for taxpayers owning certain types of property with appreciable environmental, historic, or recreational value. n

Published in Probate & Property, Volume 37, No 5 © 2023 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.

September/October 2023 61

LAND USE U P D AT E Thinking Beyond Curb Cuts and Ramps: Planning and the ADA This is the tale of three communities confronting issues of sidewalk accessibility. These situations go to the core of accessibility planning, not simply legal disputes about curb cuts, ramps, and accessible sidewalks. Each community deals with what it means to be accessible and what is required to comply with our disability laws. As is typical, these difficulties are often exemplified by disputes involving everyday accessibility problems, such as those relating to sidewalks.

Title II of the Americans with Disabilities Act (ADA) protects persons with disabilities from discrimination in services, programs, and activities provided by state and local government 42 U.S.C. §§ 12131-12165. Under Title II of the ADA, there is no obligation to build sidewalks, but if sidewalks are built, these sidewalks come within the domain of Title II. Specifically, sidewalks are considered a state and local government program, service, or activity. At the same time, sidewalks can also come within the ADA as facilities.

And if federal funds are used to support the building of sidewalks, the state and local governments are also subject to Section 504 of the Rehabilitation Act. 29 U.S.C. § 749. Under both federal acts, all new sidewalks and alterations of existing sidewalks must be accessible Land Use Update Editor: Daniel R. Mandelker, Stamper Professor of Law Emeritus, Washington University School of Law, St. Louis, Missouri. Contributing Author: Robin Paul Malloy, E.I. White Chair and Distinguished Professor of Law, Syracuse University

to the maximum extent possible. Moreover, sidewalks must be maintained and kept in good and usable condition.

Sidewalks are an essential part of the community infrastructure. They permit people to navigate easily and safely among and between the many venues where life is experienced – home, school, work, shopping, entertainment, worship, recreation, and political participation. Some people may believe that sidewalks are mundane, ordinary, and insignificant, but for others, sidewalks are vital pathways to community participation. Accessibility is an important factor to consider in the planning process when we recognize that nearly 20 percent of American families have a family member with a mobility impairment, and approximately 20-25 percent of the US population have some disability. And for communities with an aging population, the rates of disability are even higher.

Tale One This past spring, the city of Sacramento, California, was the target of a class action lawsuit brought on behalf of people with disabilities. See Hood v. City and County of Sacramento, No. 2:2023 at 00101 (E.D. Cal. Feb. 7, 2023). The issue in the case positions the rights of people with disabilities to have safe and easy access to sidewalks against the rights of people experiencing homelessness to occupy public spaces that include sidewalks. The homeless population in places such as Sacramento poses several planning difficulties. Among current concerns is that many unhoused people occupy public sidewalks with tents and

makeshift shelters for themselves and their possessions. In doing so, the sidewalks are blocked, making it difficult or impossible for people in wheelchairs to navigate the community safely and easily. In the face of inaction on the part of the city and the county, disability-rights activists have sued the city for violating the ADA for failing to maintain accessible sidewalks by not removing the homeless people who are blocking them.

Tale Two The Town of DeWitt, New York (a suburb of Syracuse) defines sidewalks as “snow shelves” to avoid an obligation to keep the sidewalks clear of snow in the winter. Town of DeWitt, N.Y. Code § 192-19.1. Snow removal is expensive, especially in a community that does not find it unusual to receive 150 inches of snow during winter. Maintaining sidewalks and keeping them clear of snow and ice for people with disabilities requires specially sized snow removal equipment and a budget for many hours of labor. In a planning move, the town added a provision to the local zoning code defining sidewalks as snow shelves, which are places where snow can be placed during the winter months. This designation allowed street plows to push the street snow onto sidewalks while simultaneously permitting sidewalks to remain inaccessible. When pressed on the subject of failing to maintain accessible ADA sidewalks, the town has responded by asserting that the ADA does not cover snow shelves.

A sidewalk by any other name is still a sidewalk and, as such, is covered by the ADA.

Published in Probate & Property, Volume 37, No 5 © 2023 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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LAND USE U P D AT E

Tale Three In May of this year, a contact from a small community in upstate New York informed me of her concern that her community, rather than repairing broken and unsafe sidewalks, may simply remove some bad sidewalks and not replace them. When sidewalks fall into disrepair and become buckled and cracked, they present difficulties for use.

They also raise potential liability issues for communities when a person falls and is injured using an unsafe sidewalk.

Such sidewalks effectively deny access to people in wheelchairs and people with other mobility impairments.

Tearing up these broken sidewalks and replacing them with new ADAcompliant sidewalks is expensive. For some communities with budget constraints, removing the old sidewalks and replacing them with grass is significantly cheaper. The thinking is that, in as much as there is no obligation to provide sidewalks in the first instance, removing an old sidewalk does not require replacing it with a new one.

Moreover, planting grass where once there was concrete may signal a commitment to reclaiming green space, thus pitting people with disabilities against supporters of green development.

In each of these cases, we find communities struggling with the need for greater accessibility. At the core of the problem, we see fundamental disagreements about what it means for a community to be accessible and questions about what is required to comply with federal disability law. These are not issues of sidewalk design or proper curb cutting and ramping; these are higher-order issues about the law and the practice of good land planning and zoning.

In each of the three scenarios, there are competing interests at stake. There are also competing claims regarding the proper use of limited budgetary resources. Legally, there are concerns about a lack of compliance with our disability laws. First, sidewalks are fundamental infrastructure for accessing community life. Tolerating blocked sidewalks, broken sidewalks, and sidewalks covered in snow deprives people with disabilities of equal access to community resources. Thus, in addition to violating specific requirements under Title II of the ADA, such conditions raise questions of violating the equal protection clause of the Constitution.

This potential claim arises, for example, when a sidewalk, although broken and

cracked or intruded upon by a homeless encampment, is still usable by people not in a wheelchair but unusable by those in a wheelchair. On the issue of taking out and not replacing an existing sidewalk, a different concern arises. Although difficult to prove, such actions may be examples of intentional discrimination and disparate treatment under Title II. There is an element of animus in responding to a need to update programs, services, or activities by eliminating them so that a community does not have to pay for complying with our disability laws. In planning, therefore, it is vital to maintain a good record of the discussions and studies behind such actions and to evaluate their potential effect on people with disabilities relative to people not protected by the ADA. Planning for accessibility is essential.

These disputes concerning sidewalks illustrate a larger and deeper problem related to the lack of deliberative planning for our disability laws. Therefore, lawyers and planners need to work collaboratively to address the fact that much more needs to be done to meet the accessibility needs of all our community members. n

An Estate Planner’s Guide to Qualified Retirement Plan Benefits, Sixth Edition

By Louis A. Mezzullo This clearly written guide, now completely revised and updated, provides comprehensive, practical advice for the non-ERISA specialist on how to structure benefits from qualified retirement plans and IRAs to achieve maximum benefits for your client.

ambar.org/retirementplanbenefits Published in Probate & Property, Volume 37, No 5 © 2023 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.

September/OctOber 2023

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THE LAST WORD He Spends More Time with His Dog than His Wife A prior Last Word column focused on ambiguity versus vagueness. 37 Prob. & Prop. 64 (Mar./Apr. 2023). Recall we talked about ambiguity as a lack of clarity because of two or more possible interpretations. The discussed form of ambiguity flowed from word choice, termed lexical ambiguity. One example in that column was the sentence, “James Bond favors a cool drink.” The reader cannot discern whether “cool” means trendy or chilled.

But uncertainty and lack of clarity also can result from grammatical construction. The form of ambiguity that flows from grammar is syntactic ambiguity, or amphibology. For example, consider the sentence, “He spends more time with his dog than his wife.” The reader is unsure whether he spends more time with his dog than the amount of time his wife spends with the dog or more time with the dog than the amount of time he spends with his wife.

To unpack amphibology, we explore the glide path from syntax to semantics and land on pragmatics.

that “she” is the subject, “rang” is the verb, and “the bell” is the direct object.

This sentence is crisp and clear.

Syntax also uses a combination of independent and dependent clauses.

An independent clause can act as a stand-alone sentence, such as “She rang the bell.” A dependent clause is not a complete sentence but might support or give more context to the independent clause. You can add a dependent clause to a simple sentence to enrich it: “After reaching the mountain summit, she rang the bell.” Everything up to the comma in that sentence acts as a dependent clause to modify the independent clause. And, of course, order matters. Note the time nuance from shifting the dependent clause to the end of the sentence: “After exercising, he lifted the box,” and “He lifted the box after exercising.” The first suggests that after implementing an exercise program, the subject developed muscle strength sufficient to lift the box. In contrast, the latter suggests that the subject lifted the box immediately after an exercise session.

Syntax The way the words are ordered is syntax. Three focus points are subject-verb agreement, proper word choice, and correct order of phrases and words.

Proper syntax makes it easy for a reader to understand the expressed ideas.

Sentences are often structured as a subject plus verb plus a direct object.

For example, “She rang the bell.” The syntactic analysis of this sentence is

Semantics Semantics refers to the meaning of a sentence. Without proper semantics, the meaning of a sentence can be completely different from what is intended.

In legal writing, proper semantics is crucial because it can alter the meaning of a sentence with the order of the words and the use of deixis.

Consider the sentences “The dog ate the homework” and “The homework ate the dog.” Both are grammatically correct, but the latter makes less sense and doesn’t sound plausible.

Semantics can also rely on deixis, which is the use of common words that give context to a place, time, or person.

The Last Word Editor: Mark R. Parthemer, Glenmede, 222 Lakeview Avenue, Suite 1160, West Palm Beach, FL 33401, mark. parthemer@glenmede.com.

Tomorrow, she, and there are examples of words that can help clarify the meaning of a sentence. For example, “She is coming to dinner” is a sentence that sparks urgency, whereas “She is coming to dinner tomorrow,” where the indexical word is “tomorrow,” alerts the reader that the person prepping for the dinner has more time to prepare. Returning to a previous example, note the clarity from “After exercising for a month, he was able to lift the box” and “He was able to lift the box immediately after exercising.”

To summarize, syntax refers to grammar and rules designed to ensure a sentence is grammatically correct.

Semantics refers to meaning and how the lexicon, structure, tone, and other elements coalesce to communicate meaning.

Pragmatics Pragmatics considers the semantics of a sentence in a particular context. It is less concerned with literal meaning and more with the practical interpretation of a sentence. Take the sentence, “I’m so hungry I could eat a horse.” The semantics of that sentence are clear enough—the speaker is hungry and would consider eating a horse. Pragmatics considers the words of this sentence in context; the sentence presupposes that the speaker might not literally want to eat a horse but instead is hyperbolically expressing the speaker’s state of hunger.

Concluding Thoughts Writing legal documents with clarity includes battling not only lexical, but also syntactic, ambiguity. Writing with care and attention to avoid ambiguity will provide better communication to, for, and with your clients. n

Published in Probate & Property, Volume 37, No 5 © 2023 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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