Probate & Property - November/December 2023, Vol. 37, No 6

CELEBRITY ESTATE PLANNING: MISFIRES OF THE RICH AND FAMOUS

PRACTICE CONSIDERATIONS FOR THE CORPORATE TRANSPARENCY ACT

RECONSTRUCTING GST EXEMPTION ALLOCATIONS

VOL 37, NO 6 NOV/DEC 2023

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

ENVIRONMENTAL DILIGENCE IN THE ERA OF PFAS

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September /OctOber 2023

November/December 2023 1

CONTENTS November/December 2023 • Vol. 37 No. 6

6 16

FEATURES 6

Environmental Diligence in the Era of PFAS: The Pitfalls of Simply Ordering the Phase I

49

By Nancy J. Rich

16

Celebrity Estate Planning: Misfires of the Rich and Famous VI

A Guide to Reconstructing GST Exemption Allocations and Calculating the Inclusion Ratio of a Trust

By Carol Warley, Abbie M.B. Everist, Amber Waldman, and Tandilyn Cain

By Jessica Galligan Goldsmith, Erica Howard-Potter, John S. Kiely, Merrie Jeanne Webel, Kristen A. Curatolo, David E. Stutzman, and Samuel F. Thomas

24

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

DEPARTMENTS 4

Uniform Laws Update

10

Keeping Current—Property

20

Keeping Current—Probate

55

Technology—Property

By Harvey E. Bines

58

Land Use Update

Federal Case Summaries

60

Career Development and Wellness

61

2023 Index

64

The Last Word

By Janet M. Johnson

36

40

The Corporate Transparency Act: A High Altitude Pathway and Some Practice Considerations

By Manuel Farach

44

The Law of a Last Request: Bury Me with My Favorite Toy, Part 1

By William A. Drennan

Published in Probate & Property, Volume 37, No 6 © 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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November/December 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 iStockphoto

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 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 $95 and an application addressed to the Section; ABA membership is a prerequisite to Section membership. Individuals and institutions not eligible for ABA membership may subscribe to Probate & Property for $150 per year. Requests for subscriptions or back issues should be addressed to: ABA Service Center, American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598, (800) 285-2221, fax (312) 988-5528, or email orders@americanbar.org.

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

Published in Probate & Property, Volume 37, No 6 © 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.

November/December 2023 3

UNIFORM LAWS U P D AT E The Uniform Commercial Real Estate Receivership Act Brings Clarity to Receivership Procedures In 2015, the Uniform Law Commission approved the Uniform Commercial Real Estate Receivership Act in response to concerns from the real property community about the patchwork of receivership laws in various states, and even differing practices by individual judges within a state. Most states did not provide any statutory guidance on the process for appointing receivers or the scope of their powers. In states with ambiguous receivership laws, receivers who take possession of real property can be faced with decisions that are beyond the scope of the governing law, such as when or how to post a bond, the procedures to notify interested creditors, or whether it is appropriate to sell the receivership property.

Twelve states have enacted the Uniform Commercial Real Estate Receivership Act (Arizona, Connecticut, Florida, Maryland, Michigan, Nevada, North Carolina, Oregon, Rhode Island, Tennessee, Utah, and West Virginia). The act offers a comprehensive, clear set of procedures for the administration of commercial property by a receiver, who is a court-appointed representative responsible for property in a variety of scenarios. Receivers may be appointed (1) to prevent waste, deterioration, or removal of real property while litigation or an appeal is pending, (2) to enforce a judgment against a parcel of

Uniform Laws Update Editor: Benjamin Orzeske, Chief Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602. Contributing Author: Jane Sternecky, Legislative Counsel, Uniform Law Commission.

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.

real property, (3) to preserve real property while a corporation, partnership, or other type of legal entity is being dissolved or winding up, or in the event of corporate dysfunction, (4) to work on behalf of a creditor to manage or liquidate the real property of an insolvent debtor, or (5) to enforce a mortgage in default on behalf of a mortgage lender.

The act provides this much-needed guidance in several ways. First, the act requires notice to those affected by the proposed receivership and provides these individuals with the opportunity for a hearing before the issuance of most orders. The act establishes that the enacting state’s court of general equity jurisdiction will have exclusive jurisdiction over receivership proceedings.

To clear up ambiguity surrounding the appointment of the receiver, the act sets qualification standards for receivers, mandates that the receiver post a bond or alternative security, and requires the receiver to be independent of all interested parties.

With regard to the legal effect of a receiver’s appointment, the act establishes that the receiver assumes the status and priority of a lien creditor

for transactions involving the receivership property. Once the receiver is appointed, the act requires all property subject to the receivership to be turned over to the receiver and all payments on debts that are receivership property to be made to the receiver. Under the act, creditors must file claims with the receiver to receive distributions or proceeds from the receivership property, and the receiver is permitted to recommend the disallowance of any such claims. The receiver is granted immunity from liability for acts or omissions within the scope of the receiver’s appointment. The receiver is authorized to pay necessary professionals to assist with the administration of the receivership.

The act further permits the receiver to use, sell, lease, license, exchange, or otherwise transfer receivership property outside of the ordinary course of business but only with court approval.

Additionally, the act gives the receiver the option to enter into an executory contract with the property owner, with procedures for both adoption and rejection of a proposed executory contract.

To ensure that creditors and other interested parties remain updated on the actions of the receiver, the act requires the receiver to file interim reports during the receivership and, once the receivership concludes, a final report.

Because the act grants jurisdiction over receivership to state courts, the receiver would traditionally be entitled to manage property that is within the boundaries only of the appointing jurisdiction. However, to address this issue for receivership properties located

Published in Probate & Property, Volume 37, No 6 © 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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November/December 2023

UNIFORM LAWS U P D AT E

in multiple states, the act authorizes the appointment of a qualified receiver who has been previously appointed in another state. This ancillary receiver is granted the same rights, powers, and duties as a regular receiver appointed under the act.

A key feature of the act is that in the event the receiver is appointed by the request of a senior lienholder for purposes of a sale of the property, the property can be sold on the open market, free and clear of any junior liens or rights of redemption, and without the consent of junior lienholders.

By contrast, in the event a junior lienholder obtains the appointment of a receiver, the property cannot be sold free and clear of senior liens without the consent of the senior lienholders.

This procedure avoids foreclosure, which often results in a “distress sale” of the property for a price less than market value, while still providing the assurances of judicial review and confirmation and preserving the buyer’s ability to operate the property under the receivership.

Finally, the act establishes that a mortgage lender who requests the appointment of a receiver for property secured by the mortgage does not assume the liabilities of a mortgagee in possession. Similarly, the appointment of the receiver does not modify or limit any remedies that were available to the mortgage lender before the appointment.

Notably, the act applies only to commercial, and not consumer, properties.

Residential properties with one to four dwelling units are generally not covered by the act. The act does cover properties that have a primary purpose of agricultural, mining, or other incomegenerating activity on the land, even if the property owner incidentally occupies a residence. The act also covers properties of any size that are rented out to tenants who are unaffiliated with the property’s owner.

The Uniform Commercial Real Estate Receivership Act provides comprehensive guidance for the appointment of a receiver and the procedures involved in the receivership. It should be considered in every state where it has not yet been enacted. n

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November/December 2023 5

Environmental Diligence in the Era of PFAS Getty Images

The Pitfalls of Simply Ordering the Phase I

By Nancy J. Rich Published in Probate & Property, Volume 37, No 6 © 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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November/December 2023

A

Phase I environmental site assessment (ESA) serves two primary purposes: • Due diligence—by identifying contamination issues relative to the acquisition, leasing, and financing of real property in real estate, corporate, and lending transactions; and • Liability relief—by allowing purchasers and tenants of real property to qualify as bona fide prospective purchasers (BFPPs), who will not be liable under federal and state Superfund-type laws for preexisting contamination, provided that going forward, they comply with applicable due care–type requirements for maintaining BFPP status.

In some circumstances, buyers, tenants, lenders, and insurers may be satisfied with a more limited “desktop review” of information derived from public and proprietary databases (and, in some cases, a call with the target’s management), in lieu of a Phase I ESA. For example, lenders and insurers may accept a desktop review for an acquisition of a business that does not generate wastes of potential concern, and which is located at a leased commercial property at which vapor intrusion into the buildings is unlikely.

For those who wish to qualify as a BFPP under the federal Superfund law—i.e., the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §§ 9601 et seq., and analogous state laws, purchasers and tenants must comply with the All Appropriate Inquiry (AAI) regulatory standards adopted by the EPA. The easiest way to demonstrate compliance is to obtain a Phase I ESA from a consulting firm that certifies that the ESA complies with the current EPA-approved Phase I ASTM Standard.

Nancy J. Rich is a partner at Katten in Chicago, Illinois. She is Chair of the Commercial Real Estate Transactions Group’s Green and Sustainable Transactions Committee.

The US Environmental Protection Agency (EPA) is required to promulgate an updated Phase I ESA every eight years. EPA relies on ASTM’s panel of environmental experts to develop the proposed revised standard. The current Phase I standard—i.e., the American Society for Testing and Materials (ASTM) International E1527-21, “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process”—has been in effect since February 13, 2023. Upon EPA’s publication of the final rule in the Federal Register, ASTM E1527-21 became the current legal standard for performing Phase I environmental assessments.

What Is Different in ASTM E1527-21 The current ASTM E1527-21 standard contains multiple changes from the current standard. Most of the changes clarify issues and questions that arose during the life of the ASTM E152713 standard. These types of changes include: • clearer definitions, including Recognized Environmental Condition (REC), Controlled Environmental Condition (CREC), and Historic Environmental Condition (HREC); • clarification of what is a significant data gap; and • clarification of when a Phase I ESA report expires.

The more expansive changes in ASTM E1527-21 include: • emphasis of the need to evaluate the potential for vapor intrusion, including the potential for impacts caused by historical uses of adjacent and nearby properties; and • the requirement for the consultant, referred to as the environmental professional (EP), to perform a more thorough review of information sources than the prior E1527-13 standard. For example: • the old E1527-13 standard required the EP to review additional sources such as property tax records or

building department records if the subject property is used for industrial or manufacturing purposes, provided that these records are readily available and relevant to the assessment; but • the new E1527-21 standard extends these requirements to retail properties. This means that EPs are required to take a closer look at the history of retail properties and, thus, potentially identify more issues.

What Is Not within the Scope of a Phase I ESA Although the ASTM E1527-21 standard does identify and acknowledge new non-scope considerations, such as emerging contaminants, all non-scope considerations are exactly that—not encompassed within the scope of a Phase I ESA. When a party “orders the Phase I,” it should be aware that the environmental consulting firm will not include any other issues unless the ordering party expands the scope of the engagement to include each specific non-scope item that may be relevant to its due diligence of the property.

Emerging Contaminants Arguably, the most significant clarification in the E1527-21 standard is that until a contaminant is listed as a hazardous substance under CERCLA, it is not within the scope of the standard and, as such, is not required to be discussed in a Phase I ESA report. This excludes emerging contaminants such as per- and polyfluoroalkyl substances (PFAS). The current exclusion of PFAS from the scope of the ASTM Phase I ESA standard is extremely important because PFAS are increasingly the subject of litigation under various toxic tort and environmental theories.

PFAS are a large class of thousands of synthetic chemicals that have been used since at least the 1950s in a wide variety of consumer products, including food packaging, carpeting, and nonstick cookware. They have also been widely used in the manufacturing of chemicals

Published in Probate & Property, Volume 37, No 6 © 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.

November/December 2023 7

BFPP status will not protect a new property owner from toxic tort liability if the plaintiff can meet the applicable elements of proof.

such as firefighting foam. PFAS are known as “forever chemicals” because they are extremely stable and persistent in the environment and in the human body, meaning they do not break down and can accumulate over time.

Because some PFAS are linked to negative effects on human health, the presence of PFAS in drinking water supplies has become a particular focus of environmental concern. All PFAS contain carbon-fluorine bonds, which are one of the strongest chemical bonds in organic chemistry. This means that they resist degradation in the environment. Most PFAS are also mobile when released into the environment, which means they may migrate a significant distance away from the source of their release, contaminating groundwater, surface water, and soil. Remediation of PFAS in the environment is technically difficult and, consequently, expensive.

PFAS litigation is arguably “the new asbestos” for the plaintiff ’s bar.

For example, on June 22, 2003, 3M agreed to pay up to $12.5 billion to settle lawsuits by communities around the country. The plaintiffs alleged that the company’s PFAS-containing products contaminated their drinking water. More than 20 state attorneys general have sued manufacturers to seek penalties and injunctive relief for investigation and remediation of PFAS contamination in their states.

EPA issued a PFAS Strategic Roadmap on October 18, 2021. EPA stated that the Roadmap is intended to set timelines by which EPA plans to take specific actions and commits to new policies to “safeguard public health, protect the environment, and hold polluters accountable.” In September

2022, EPA proposed to designate two PFAS—perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), and their salts and structural isomers—as hazardous substances under CERCLA. It will likely take some time, however, before EPA issues a final rule to designate PFOA or PFOS as CERCLA hazardous substances. In April 2023, EPA issued an Advance Notice of Proposed Rulemaking asking the public for input regarding potential future hazardous substance designations of other PFAS under CERCLA. EPA has also proposed a National Primary Drinking Water Regulation for six PFAS, including PFOA, PFOS, perflorononanoic acid (PFNA), hexafluoropropylene oxide dimer acid (HFPO-DA, commonly known as GenX Chemicals), perfluorohexane sulfonic acid (PFHxS), and perfluorobutane sulfonic acid (PFBS).

As EPA moves forward with its own PFAS Roadmap, many states have also enacted their own regulations regarding PFAS in drinking water and consumer products or are in the process of considering such regulations. Although EPA’s web page listing state resources does not include all states and does not list specific state laws or regulations, it may be a useful starting point for access to fact sheets and general descriptions of efforts in covered states: U.S. State Resources about PFAS, EPA (updated May 30, 2023), https://tinyurl. com/27dfu6f9.

Scoping Deal-Specific Environmental Due Diligence What do the complexity and the ongoing evolution of regulatory standards mean for attorneys advising their

clients on the scope of environmental diligence? Depending on the transactions, clients may intend to acquire a fee interest, a security interest, or a long-term ground lease or may take title via an inheritance.

Current and Former Manufacturing Properties An ASTM-compliant Phase I investigation should be routinely performed at properties with a history of manufacturing because it will allow the client to qualify as a BFPP under CERCLA. BFPP status will not protect a new property owner from toxic tort liability if the plaintiff can meet the applicable common law elements of proof: (i) the existence of a legal duty, such as preventing continued discharge of PFAS into a public water supply or plaintiff ’s private drinking water wells; (ii) a breach of the duty, such as failure to investigate or remediate; (iii) the plaintiff ’s actual injury; and (iv) that the defendant’s breach was the proximate cause of the injury. Thus, in order to rule out migration of PFAS contamination from a property, PFAS should also be addressed at these facilities as an add-on to the Phase I report, or as a separate task addressed in a stand-alone report. Also note that the presence of PFAS contamination will likely make a property less marketable, especially as public awareness of PFAS concerns increases over time. The same analysis applies to other Phase I non-scope items, such as when the date of construction of one or more buildings on the property indicates the potential for asbestos-containing building materials.

What If the Client Is Acquiring a Business?

If the client is purchasing stock of a business that will continue to operate in its current form, the environmental due diligence inquiry should also focus on the business’s potential PFAS and potential risks not covered by a standard Phase I ESA. Foreseeable liability risks may exist in certain situations. For example, regarding PFAS, such risks may exist if a client purchases or inherits a business that is,

Published in Probate & Property, Volume 37, No 6 © 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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November/December 2023

or reasonably might be alleged to be, introducing PFAS-containing materials or wastes into the environment or into products that would, in each case, (i) be expected to cause human exposure or (ii) exceed any applicable regulatory limits. To assess the risk of possible future personal liability in these scenarios, counsel should inquire whether the client or its employees intend to be directly and personally involved in the environmental management of the business. Although imposition of personal liability is rare, it is prudent to advise clients to avoid any appearance that an individual manager knowingly authorized the discharge or use of CERCLA hazardous substances, PFAS, or any other potentially harmful materials in a manner that would be expected to cause personal injuries or other damages.

Are Lenders Becoming More Likely to Evaluate Potential PFAS Liabilities Associated with Their Collateral?

As awareness of PFAS liabilities increases, lenders’ concerns regarding the potential risks of lending to borrowers who may have potential liabilities associated with PFAS will likewise

increase. Lenders’ counsel should be proactive in working with their clients to evaluate whether loan applicants may have PFAS liability risks during the loan—i.e., past or current releases of PFAS or introduction of PFAS into consumer products. As in asbestos litigation, a party that has been previously sued by the plaintiffs’ bar or regulatory authorities tends to have a higher risk of being named as a defendant in future lawsuits.

Will Environmental Insurance Protect Against Future Liabilities Related to PFAS? The short answer is no, except in rare cases Pollution Legal Liability (PLL) coverage may be a useful tool to address many other types of potential liabilities associated with alleged property damage and personal injury resulting from other types of contamination. For several years, however, almost all PLL insurers have been expressly excluding coverage for PFAS-related liabilities.

Key Takeaways It is critical for attorneys and their clients to evaluate whether a standard Phase I ESA provides a sufficient, or

even appropriate, scope of environmental diligence. The exclusion of PFAS and other non-scope considerations, including asbestos, lead, radon, and wetlands, and including the safety of the workplace environment, is just one reason not to simply “order the Phase I” in connection with buying, leasing, or financing a property or business with potential environmental concerns.

Whether to add non-scope considerations to the Phase I ESA will continue to be a business decision on a case-by-case basis. At some properties, environmental and worker safety compliance assessments may be more likely to identify issues of concern than the Phase I ESA. Addressing emerging contaminants such as PFAS will depend on business goals, lender requirements, and whether the property is located in a state that already regulates PFAS as hazardous substances. Attorneys should anticipate future marketability concerns associated with non-scope matters, including the impact of the proposed federal regulation of at least some PFAS as CERCLA hazardous substances and as substances subject to National Primary Drinking Water Regulations. n

Published in Probate & Property, Volume 37, No 6 © 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.

November/December 2023 9

KEEPING CURRENT PROPERTY CASES ANNEXATION: Annexation agreement binds purchaser who acquires only part of annexed subdivision.

In 2003, the Village of Kirkland and a landowner entered into an annexation agreement, providing that the village would annex 114 acres of land to be developed as a residential subdivision.

The recorded agreement was executed under the Illinois Municipal Code sections titled “Annexation Agreements,” 65 Ill. Consol. Stat. §§ 5/11-15.1-1 to 11-15.1-5, the goal being to allow the village to ensure orderly growth and quality of life in a manner that served the best interests of all. In 2017, Kirkland Properties Holding Company acquired title to 34 of the 82 lots in the subdivision subject to the annexation agreement. The village filed suit when Kirkland Properties failed to comply with provisions of the agreement, including completion of the roads.

The trial court dismissed the village’s complaint with prejudice because Kirkland Properties had purchased less than the whole of the annexed land and thus was not a successor under the annexation agreement to be bound by its provisions. The appellate court reversed, and the supreme court affirmed, rejecting the assertion that the absence of language in the Municipal Code or annexation agreement expressly stating the agreement is binding on successor owners of the entire parcel or any portion thereof, freed Kirkland Properties of successor liability. Indeed, the opposite reasoning was compelling—nothing in the code states that an annexation agreement is binding only upon successor owners of the entire 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.

parcel annexed. The court read the dictionary meaning of “successor” to mean all lot owners who purchased land in the annexed subdivision. Also, the annexation agreement expressly required its provisions to be binding on successors as the subdivision developed in stages. Village of Kirkland v. Kirkland Prop. Holdings Co., 2023 Ill. LEXIS 327 (May 18, 2023).

BANKRUPTCY: Bankruptcy discharge does not accelerate balance on note secured by mortgage to start statute of limitations on lender’s foreclosure action. In 2012, a bankruptcy court discharged Silvernagel’s personal liability on his mortgage debt under Chapter 7 of the Bankruptcy Code, see 11 U.S.C. § 727 (2018), but the discharge did not extinguish the mortgage on the debtor’s home. In 2019, US Bank threatened to foreclose on the property if Silvernagel did not make payments. In response, Silvernagel requested declaratory relief to prevent US Bank’s enforcement of the mortgage. He argued that US Bank’s interest was extinguished by the six-year statute of limitations. Alternatively, he asserted that the doctrine of laches prevented enforcement of the agreement.

US Bank moved to dismiss, arguing that the loan’s maturity date was in 2036 and that its claim had not accrued, such that the relevant statute of limitations had not commenced. The trial court granted US Bank’s motion and dismissed the case, concluding that the remaining debt was not yet due because US Bank never accelerated payment on the note. The

trial court also determined that the doctrine of laches did not apply. Silvernagel appealed, and the intermediate appellate court reversed, holding that the balance of the mortgage became due upon the bankruptcy discharge, at which point the lender’s claim accrued and the statute of limitations began to run. Because six years had passed since the discharge, the court determined that US Bank’s claim had expired. The supreme court reversed.

The court explained that an acceleration of the debt requires a “clear, unequivocal” affirmative act by the lender, but all Silvernagel alleged was that the lender “did not commence any action to enforce its rights under the note within six years” of his default. This was not an acceleration, and Silvernagel could not unilaterally accelerate the payments by filing bankruptcy. Nor did the discharge in bankruptcy operate to accelerate the debt.

After bankruptcy, a mortgagee’s only recourse is against the property. Although the debtor is no longer personally liable on the note, if the debt is not voluntarily paid, the debtor risks losing the property in foreclosure. US Bank Nat. Ass’n. v. Silvernagel, 528 P.3d 163 (Colo. 2023).

EASEMENTS: Easement granting “absolute water rights” allows easement holder to grant rights to neighbors to use servient estate. In 1961, Duke Power Company purchased an easement from the Kisers covering 280 acres of largely dry land to create a lake. Duke also purchased an interest in the surrounding lakebed property to construct a dam under a federal license it held to operate a long-term hydroelectric project. Duke later flooded the land, now known as Lake Norman, and the Kisers retained some land, now known as Kiser Island, which they partially subdivided and sold as waterfront lots. Duke later implemented shoreline management guidelines and issued permits to the owners of the waterfront lots to build

Published in Probate & Property, Volume 37, No 6 © 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

Braden’s Folly, LLC owned two contiguous coastal properties on Folly Beach—one beachfront and the other further upland—with a singlefamily residence on each lot. To restrict accelerated beach erosion, the City of Folly Beach amended an ordinance thereafter requiring certain contiguous lots under common ownership to be merged Retaining wall built by the Kisers in Duke Energy Carolinas. into single larger lots.

The ordinance did not docks. During a 2015 drought, the lake affect the existing use of Braden’s lots, receded, and Kiser, without permit or but Braden challenged the ordinance as permission, built a retaining wall and a taking on the basis that Braden could filled an area covering 2,449 square feet no longer sell the lots individually. Applyof Duke’s previously submerged easeing the regulatory takings three-factor test ment. Duke sued, alleging trespass and from Penn Central Transportation Co. v. City wrongful interference with the easement, of New York, 438 U.S. 104 (1978), the trial seeking the removal of the retaining wall court agreed that the ordinance effected and restoration of the disturbed shorean as-applied taking. The supreme court line. Kiser challenged Duke’s authority to reversed, first highlighting the unique demand the removal of the retaining wall circumstances in Folly Beach where coastand claimed that Duke had exceeded the line erosion was such an issue that the scope of the easement by issuing dock city received an exemption from the permits to third parties and allowing state beachfront management legislarecreational use of the waters. The trial tion, allowing it to act in the state’s stead court rejected the defense and ordered in protecting the beach. The city passed the removal of the wall and obstructing various ordinances to slow “super-beachmaterial. The appellate court reversed, front” development that was exacerbating holding an easement holder cannot perbeach erosion enough that federally mit strangers to the easement to make funded beach renourishment was threatuse of the servient estate, other than for ened. In applying the Penn Central factors, the easement holder’s benefit, without the court found that economic impact the consent of the servient landowner. favored the city, agreeing that the ordiThe supreme court in turn reversed, notnance prevented the most profitable use ing the easement gave “absolute water of Braden’s property—the sale of the lots rights” to “treat” the servient estate “in any separately—but profitability was recogmanner deemed necessary or desirable.” nized as speculative and offset by the The court saw this language as clear and fact that there was no physical restricunambiguous, plainly allowing Duke to tion of the land and that Braden could do what it did. Moreover, the court found continue renting out the lots. Regarding this construction consistent with the Braden’s investment-backed expectations, purpose of Duke’s federal licensing oblimany factors weighed both favorably gations as confirmed by the practice of all and against Braden—significantly, the affected parties for more than 60 years. court found, Braden only half-heartedly Duke Energy Carolinas, LLC v. Kiser, 886 attempted to realize its purported investS.E.2d 99 (N.C. 2023). ment-backed expectations by placing the lots on the market, all the while the need EMINENT DOMAIN: Ordinance merg- for regulation in coastal areas had become ing commonly owned contiguous lots evident. As it became apparent that the to reduce development and combat developed lot was the source of the floodbeach erosion is not a regulatory taking. ing, it became objectively unreasonable

for Braden to expect to own the lots with no restrictions or regulations affecting its ownership, including its ability to alienate the property in whatever manner it chose. On the third factor, the character of the government action, the ordinance was a responsible land-use policy enacted as part of a coordinated governmental effort similar to others employed nationwide.

Braden’s Folly v. City of Folly Beach, 886 S.E.2d 674 (S.C. 2023).

FORECLOSURE: Mortgagor is not required to prove amount owed in challenge to lender’s affidavit of debt in foreclosure action. A lender sought a judgment of foreclosure against the mortgagor, alleging the principal amount owed to be $417,000. The mortgagor only answered perfunctorily, asserting he owed the lender nothing. The court granted the lender’s motion for summary judgment, and thereafter the lender moved for strict foreclosure and offered in support an affidavit of debt, signed by an authorized signer, attesting that the amount owed was $749,420, including interest and town taxes. The mortgagor objected on the grounds of hearsay and inaccurate calculation of taxes and interest. When the mortgagor failed to offer evidence to support his dispute, the trial court entered judgment for the lender for the amount claimed. The appellate court reversed, and the supreme court affirmed. The Connecticut Rules of Practice provide an exception to the prohibition of hearsay by allowing a lender to prove the amount of debt by submitting an affidavit. Conn. Rules Prac. § 23-18. The supreme court, however, rejected the lender’s argument that to overcome the hearsay exception the mortgagor was required to present evidentiary support for his contention. Instead, the Rules allow proof of a debt by an affidavit stating the amount, along with the note and mortgage, only when no objection is interposed. The mortgagor’s objection concerned the amount of debt, so the hearsay exception under the Rules of Practice did not apply, leaving the burden of proving the amount on the lender. The trial court’s error had the effect of denying the mortgagor the opportunity to crossexamine the lender’s witnesses, including the affiant. JPMorgan Chase Bank v. Malick, 296 A.3d 157 (Conn. 2023).

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LANDLORD-TENANT: Tenant who leases city land for music festival has right to ban firearms. The City of Sandpoint leased the War Memorial Field to the Festival, a nonprofit corporation, for a multi-day music festival. The lease required the Festival to ensure adequate security and the safety of patrons and to provide its own general liability insurance to cover any losses or damages to any person from the operation of the music festival, naming the city as an additional insured. The Festival maintained a rule that prohibited attendees from possessing weapons, including firearms, inside the venue. That rule did not comply with state legislation that explicitly preempts cities, counties, and other political subdivisions from adopting or enforcing a rule or regulation that regulates firearm ownership, possession, or carrying. Idaho Code § 18-3302J(2). During an event, two patrons attempted to enter the festival carrying firearms, one held openly and the other carried in a bag. After they were denied entry, the Festival refunded their tickets. Thereafter, they sued seeking a declaratory judgment, alleging violations of their Second Amendment rights and Idaho Code § 18-3302J(2). The trial court denied the claim, and the supreme court affirmed. The court found the gravamen of the case to be whether a private leaseholder (the Festival) can control its leasehold unburdened by the constraints, demands, and limitations that apply to a public property owner (the City). To resolve this question, the court relied on common-law property principles that establish the rights of a tenant. The lease gave the Festival a possessory interest in the War Memorial Field, which included the right to exclude, i.e., the authority to limit where or how others entered the leasehold property and what they brought with them onto the property.

Nothing in the applicable statute or case law established that a private lessee of public property enjoys any less or different rights than a private lessee of private property. Moreover, Idaho Code § 18-3302J and the Second Amendment apply only to government actors, which the Festival was not. Herndon v. City of Sandpoint, 531 P.3d 1125 (Idaho 2023).

LIS PENDENS: Filing of lis pendens against property not at issue in pending litigation is wrongful. In 2020, Garcia sued Tygier and Rubin in Virginia, alleging that they had violated Virginia’s fraudulent and voluntary conveyance statutes. Va. Code §§ 55.1-400 and 55.1401. In 2021, Garcia filed a notice of lis pendens in the public land records of the District of Columbia, asserting his entitlement to a lien against “all the estate, real and personal” of Tygier and Rubin, and specifically against their personal residence in the District of Columbia. Tygier and Rubin sued Garcia in the District of Columbia to cancel the lis pendens and to sanction Garcia for the filing under the D.C. civil rules. The lis pendens statute allows the filing of a notice of lis pendens “only if the underlying action or proceeding directly affects the title to or tenancy interest in, or asserts a mortgage, lien, . . . or other ownership interest in real property situated in the District of Columbia.”

D.C. Code § 42-1207(b), (j). The trial court denied Garcia’s motion to dismiss the suit and awarded the entire amount of attorney’s fees they sought as a sanction against Garcia. The court of appeals affirmed, with one qualification necessitating a remand to correct the trial court’s order. First, the court ruled that the lis pendens did not meet the requirements of D.C. Code § 42-1207 because Tygier and Rubin’s ownership in their D.C. residence was not directly at issue in the Virginia lawsuit. Though Garcia predicated his right to file the notice on his supposed entitlement under the law of Virginia to a lien against any and all property of appellees, Va. Code §55.1-402, the judge in the Virginia suit informed him that his potential lien would apply only to assets that were transferred improperly to thwart creditors. In fact, Va. Code § 8.01-268, like the D.C. Code, limits a lis pendens to property whose title is at issue in the underlying action. Tygier and Rubin’s family home concededly was not such an asset, and Garcia did not allege or have reason to believe it was. Nothing in Garcia’s Virginia complaint suggested that they fraudulently or improperly transferred funds to acquire, improve, or finance the residence. The complaint did not mention the residence at all. To the contrary, Tygier and Rubin

submitted documentary proof, which Garcia did not dispute, that they purchased their residence long before the events giving rise to Garcia’s Virginia complaint. The court of appeals went on to rule that Garcia’s attorney, and not Garcia, was liable for sanctions. The improper filing of the lis pendens was law-related, the wrongfulness of which was “patently clear” with no chance of success. A reasonable pre-filing inquiry should have revealed to the attorney that the laws of both jurisdictions precluded the filing. Garcia v. Tygier, 295 A.3d 594 (D.C. 2023).

NUISANCE: Manufacturer and seller of PCBs, known to be hazardous, can be liable in nuisance for harm caused by their release into the environment by purchasers. The state filed public nuisance, trespass, and unjust enrichment claims against Monsanto, seeking the costs of cleanup of polychlorinated biphenyls (PCBs) released into the environment, causing lasting damage to public health and the state’s lands and waters. PCBs are said to be “forever chemicals” and are harmful to all animals, including fish and mammals, and are transported through soil, sediment, air, and water. The trial court dismissed the complaint, reasoning that Delaware does not recognize “product-based” claims, such that Monsanto could not be liable under public nuisance and trespass because it did not exercise control over the PCBs once sold to third parties. On appeal, the supreme court reversed, holding that Delaware law does not require control of the product once sold to be liable for environmental-based public nuisance or trespass claims. Instead, the court adopted a “common-sense” approach and drew upon the Restatement (Second) of Torts §834, cmt. b (1979) to conclude that the test is whether a defendant participated to a substantial extent in carrying out the activity that created the public nuisance or caused the trespass. Here, the state demonstrated that even though Monsanto did not control the PCBs after the sale, it substantially participated in creating a public nuisance and causing the trespass by actively misleading the public that the product was not harmful and continuing to supply PCBs to industry and consumers for decades after internal memoranda revealed their toxic effects and that they would escape into the

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environment after the sale. State ex rel. Jennings v. Monsanto Co., 299 A.3d 372 (Del. 2023).

USURY: Savings clause on interest in promissory note does not avoid usury violation. Soaring Pine Capital Real Estate and Debt Fund II, a nonbank investment group, loaned Park Street Group Realty Services $1 million to “flip” tax-foreclosed homes in Detroit, i.e., to acquire such homes, renovate them, and then sell them for a profit. The mortgage note for this loan had a stated interest rate of 20 percent, but there were fees and charges associated with the loan that, if considered interest, pushed the effective interest rate above 25 percent. The mortgage note also contained a provision—called a usury savings clause—stating that the note should not be construed to impose an illegal interest rate. After paying more than $140,000 in interest on the loan, Park Street stopped making payments, and Soaring Pine sued. Park Street defended by asserting that Soaring Pine violated the criminal usury statute, Mich. Comp. Laws § 438.41, by knowingly charging an effective interest rate exceeding 25 percent and therefore was barred by the wrongful-conduct rule from recovering on the loan. Soaring Pine countered that the fees and charges associated with the loan were not interest and that the usury savings clause prevented usury. The trial court granted in part and denied in part both parties’ motions, agreeing with Park Street that the fees and expenses tied to the loan were really disguised interest, making the loan criminally usurious, but agreeing with Soaring Pine that although the usury savings clause was enforceable, making the note not facially usurious, Soaring Pine could recover the principal owed but not interest. The intermediate appellate court affirmed. The supreme court reversed.

In a thorough examination of the history and policy behind the usury statute, the court found the agreement and the usury savings clause to be contrary to well-defined public policy against excessive interest and the imposition of such rates by lenders to the detriment of borrowers. Enforcing a usury savings clause if the interest provided in the loan agreement is otherwise facially usurious at

the time of contracting would defeat this end. Unscrupulous lenders would impose and collect a usurious interest rate, then invoke the savings clause if the borrower later objects, still recovering the maximum interest rate legally permitted—entirely shifting the burden of avoiding usury to the borrower. The court would not defer to a contract bargain, even between sophisticated parties, that clearly offends strong public policy. Soaring Pine Capital Real Estate & Debt Fund II, LLC v. Park Street Grp. Realty Svcs., LLC, 2023 Mich. LEXIS 959 (Mich. June 23, 2023).

recognized a distinction between legislative and adjudicative action. Legislative actions are not entitled to any process beyond the legislative process. Legislators are partial all the time, and the primary check on them acting contrary to public interest is the political process. Because the village board rezoned the Whaleys’ property by amending the village’s generally applicable zoning ordinance, it acted legislatively, and for that reason, the plaintiff was not entitled to an impartial decision-maker. Miller v. Zoning Bd. of Appeals, 991 N.W.2d 380 (Wis. 2023).

ZONING: Board member who is relative of applicant for rezoning may participate and vote because rezoning is legislative act, which does not require impartial decision-makers. The Whaleys owned property in the Village of Lyndon Station, which was zoned residential although most nearby properties were zoned commercial. They contracted to sell their property subject to the condition that it be rezoned as commercial.

They applied for rezoning. Mrs. Whaley’s mother, Jan Miller, lived with the Whaleys and served on both the village board (the local legislative body) and the village plan commission. The plan commission voted to recommend rezoning, and the board voted to approve the rezoning, with Miller participating and voting for approval in both proceedings. During public hearings, a local store owner opposed the rezoning because the Whaleys’ buyer planned to open a competing store. The store owner and other residents also challenged the conflict of interest they deemed present in Miller’s favorably voting for approval of the Whaleys’ application. An administrative agency, the village board of zoning appeals, upheld the village board’s vote to amend the ordinance. The trial court reversed, finding that Miller’s participation violated procedural due process because she was not a fair and impartial decision maker, but the appellate court reversed, finding no due process right to an impartial decision maker when a body like the board engages in legislative action as opposed to adjudicative action.

The supreme court affirmed, noting that decisions on what the due process clause requires when the state deprives persons of life, liberty, or property have long

LITERATURE ADVERSE POSSESSION: In Adverse Possession of Art, 46 Colum. J.L. & Arts 1 (2022), Prof. Herbert I. Lazerow questions the application of adverse possession theory to personal property, in particular valuable artwork. The article focuses primarily on California law but gives an overview of the national treatment of the theory. Prof. Lazerow explores the various exceptions that would deny an adverse possessor title, including laches, the discovery rule, tolling, and fraudulent concealment, and in this context discusses some of the recent cases involving Nazi-stolen art. Prof. Lazerow concludes that adverse possession should grant title to the possessor of unregistrable personal property as a theoretical proposition, but the absence of adverse possession would have little practical effect. Few possessors of artwork assert this theory. As the possessor is only concerned about being free of the claimant’s lawsuit, all that seem to matter are the running of the statute of limitations and laches. Prof. Lazerow surmises that possessors cannot be unaware of the possibility of claiming title by adverse possession. The fact that they often do not assert it indicates that it is unimportant to them.

COMMON INTEREST COMMUNITIES: Life in common interest communities is governed by a variety of rules, often fraught with conflict, ranging from what might seem simply matters of aesthetic preference—whether to allow a blue window shutter—to matters of more consequence—whether to assess owners to pay for structural repairs. Yet,

Published in Probate & Property, Volume 37, No 6 © 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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in evaluating the enforceability of the rules and decisions by the community, courts apply the same standard of review across all manner of disputes. In Forget the Pink Flamingos: The Mishandling of Common-Interest-Community Conflicts, 74 Ala. L. Rev. 821 (2023), Prof. Nadav Shoked argues that the application of identical, and deferential, analysis to problems with disparate levels of risk and potential harm is wrong-headed. Instead, he suggests a tiered system of judicial review for common-interest-community decisions—those that do not disparately affect a defined interest group within the community should remain subject to permissive review, meaning that aesthetic or lifestyle decisions need not be subjected to substantive review. On the other hand, decisions that distinctly implicate a defined group of owners’ interests should be scrutinized more closely—the substance of these decisions, not just the process of producing them, should be inspected for fairness. Prof. Shoked believes that because the most normatively troubling conflicts of interest within the community are structural, some of the circumstances giving rise to them can be isolated. The article aims systemically to categorize the types of decisions and to establish a principled framework for their treatment. Prof. Shoked starts with a broad description of the common interest form of home ownership and the prevailing approach to conflict resolution, i.e., drawing upon the business judgment rule used in corporation law, which gives almost insurmountable deference to an honest and informed decision made by the board of directors. He shows how that decision-making model may be inapt for common interest communities, given the different missions of the business corporation and a community for living. Prof.

Shoked concludes that the common interest community is not merely a product of contractual agreements, but a nexus of interests, including, sadly but inevitably, conflicting interests. Reconciling these propositions requires more nuance and allowances for different types of conflicts.

LANDLORD-TENANT: The toxicity of lead in water has been known for some time, but the removal and replacement

of the lead pipes that carry the water into homes has proven a difficult and costly proposition. In Lead and Landlords, 10 Belmont L. Rev. 284 (2023), Prof. Karen Czapanskiy discusses some of the barriers to lead remediation, starting with the technological issues—replacing ancient pipes from the water source, which not counting for costs and political will, is relatively easy to overcome, then focusing on the implementational issues—the private connections to homes, which in the case of rental property, may need a landlord’s consent. But many landlords refuse to give consent, asserting the right to exclude. When a landlord does not replace a line or consent to the replacement of the private connection, tenants continue to be exposed to significant levels of lead contamination from the pipes, and most of these tenants are people of color with low income and little wealth, who more often live in older housing in poorer neighborhoods. Prof. Czapanskiy asserts deference to a landlord’s apparent absolute power to withhold consent is questionable law. Exploring the limits of property and the contours of tenant’s rights and duties (to possession and to avoid waste) vis-à-vis the rights and duties of landlords (to the reversion of the premises and to maintain the premises in a habitable state), she argues for a redefinition of property in this dynamic, which she sees as on the “edges” of property rights, i.e., where private and public interests “inevitably interact and where both must somehow be accommodated,” to constrain a landlord’s right to refuse access for purpose of replacing privateside lead service lines. Already, a handful of jurisdictions are requiring landlords to remove and replace such lines under penalty of fines and loss of business licenses.

She makes a solid case for this movement in the law.

element for creating a real covenant, exploring how the term can be difficult to apply and lead to some burdensome results. His theme is that there is little reason to presume that the deal the original covenanting parties made to bind successors would be one that the successors would strike. On this point, Prof. Kelman states that from the vantage of successors, we would probably just adopt a blanket rule that promises are terminated upon conveyance. But this would just nullify the whole concept of real covenants—they automatically run to benefit and burden successors and would defeat investments and expectations of promises. This feature is grounded in the touch and concern requirement. Prof. Kelman proposes that a “promise touches and concerns the land if and only if it is location-specific in the sense that the benefits or burdens of fulfilling the promise are different if the bound party occupies a particular parcel than they would be for someone at other locations.” He rejects the contention made by the Restatement (Third) of Property: Servitudes (2000) that “touch and concern” is needless; that reliance on ex ante disavowal of unreasonable, idiosyncratic or spiteful covenants, coupled with ex post reformation of promises in which benefits and burdens have dramatically shifted, as both overbroad and underinclusive. Some rational promises may not be idiosyncratic, yet they make land unproductive if they have nothing to do with the land. Also, he believes that relying exclusively on ex post reformation, such as changed conditions and relative hardship, is a poor idea because many promises that should not be deemed to touch and concern would still bind because neither burdens nor benefits have shifted dramatically enough. Reforms of the doctrines governing real covenants to lighten the burdens on the promisors risk nullifying too many deals that the promisees ought to be able to rely on.

Real covenants are murky indeed. Prof. Kelman’s insights merit great attention.

REAL COVENANTS: Should all real covenants bind successors, just because they say so? Prof. Mark Kelman, in Revisiting Touch and Concern: The Perils of Degraded Contracts versus the Perils of Opportunism, 9 Tex. A&M J. Prop.

L. 263 (2023), thinks not, at least from a contracts perspective. In this article, he focuses on the “touch and concern”

REAL ESTATE FINANCE: In the current turbulence in the financial world, some lenders try to hedge losses through what appears to be a quick and efficient remedy in the event of default by the borrower. Dual collateral loans are secured by both a mortgage on real property and a security interest in the mortgagor entity that owns the real property. Stuart Glick and Vivian Arias, in

Published in Probate & Property, Volume 37, No 6 © 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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Applying Well-Settled Law to Dismantle the Clogging of the Equities Argument for Dual Collateral Loans, Real Estate Fin. J. 31 (Spring 2023), show how this very modern finance tool can be frustrated by a very ancient concept—clogging the equitable right of redemption. The lender, rather than being required to foreclose on the real property, can simply declare a default and sell the ownership interests in the entity. The authors maintain that while the theory may appear to have some superficial appeal at first blush, it utterly fails on close examination; the principal reason being that the mortgagor, a corporate entity, is a separate legal entity from its owners. The article sums up the issues very neatly.

LEGISLATION COLORADO amends landlord-tenant law to prohibit certain clauses in leases.

Residential leases may not contain oneway fee-shifting clauses or waivers of the implied covenant of quiet enjoyment, the implied covenant of good faith and fair dealing, and the right to a jury trial and may not require fees other than for possession. 2023 Colo. Ch. 372.

COLORADO amends mortgage law.

The amendment suspends the repayment obligation of a borrower whose principal residence becomes uninhabitable due to a force majeure event, including severe weather, Act of God, act of war, or any other cause beyond the control of the borrower and that could not have been prevented by the borrower while exercising reasonable diligence. 2023 Colo. Ch. 440.

FLORIDA enacts law to prevent title fraud. The provisions establish a Title Fraud Prevention Through Identify Verification Pilot Program, under which a recorder of deeds may require a government-issued photo identification of persons presenting deeds or other legal instruments for recording. The law also establishes a recording notification service, under which landowners can register to receive notifications of recordings affecting their titles. 2023 Fla. Laws ch.

238.

ILLINOIS adds immigration status as a protected characteristic under Human Rights Act. Immigration status means a person’s actual or perceived citizenship or immigration status. The amendment prohibits discrimination in the person’s access to housing, with certain exemptions. 2023 Ill. Laws 232.

MAINE enacts law to prevent unfair brokerage agreements. The law prohibits certain provisions, including binding future owners to the agreement, assignments without consent of the owner, creation of liens or encumbrances, and charging fees for services not provided.

Long-term agreements that purport to bind the owner to list the property at some unspecified future date or a listing with a term of more than two years may not be recorded. Monetary penalties for violations apply. 2023 Me. Laws 290.

TEXAS requires mortgagees to file release within 60 days of payoff of loan.

If the mortgagor requests a release within 20 days after payoff, the mortgagee or service provider must file a release within 30 days after request. 2023 Tex. HB 219.

TEXAS amends tax code to authorize sale of certain seized or foreclosed property to an owner of an abutting property without conducting a public sale. The amendments apply to otherwise unusable strips of land located in a flood zone.

2023 Tex. SB 2091.

TEXAS amends property code to allow extensions and amendments of restrictions and to allow the removal of restrictions relating to race, religion, or national origin. Extensions are allowed for certain older subdivisions, and a twothirds vote of the property owners is required. Unconstitutional restrictions cannot be extended. 2023 Tex. HB 1558.

TEXAS enacts law to preclude challenge that conveyance is sham or pretended sale. A grantor is estopped from challenging a deed conveying land other than an urban homestead to an entity when accompanied by an affidavit by the grantor acknowledging the conveyance. 2023 Tex. HB 207. n

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7. Complete mailing address of known office of publication: 321 N. Clark Street, Chicago, IL 60654-7598. 8. Complete mailing address of the headquarters or general business offices of the publisher: American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598. 9.

Full names and complete mailing address of publisher, editor, and managing editor: Publisher: American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598; Editor: Edward T. Brading, Attorney at Law, 208 Sunset Drive, Suite 409, Johnson City, TN 37604; Managing Editor: Erin Remotigue, American Bar Association; 321 N. Clark Street; Chicago, IL 60654-7598. 10. Owner (if owned by a corporation, its name and address must be stated and also immediately thereunder the names and addresses of stockholders owning or holding 1% or more of total amount of stock. If not owned by a corporation, the names and addresses of the individual owners must be given. If owned by a partnership or other unincorporated firm, its name and address must be stated): American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598. 11. Known bondholders, mortgagees, and other security holders owning or holding 1% or more of the total amount of bonds, mortgages or other securities (if there are none, so state): None.

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

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CELEBRITY ESTATE PLANNING Misfires of the Rich and Famous VI

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s estate planning professionals, we see many clients with poorly drafted documents and poorly conceived estate plans. Sometimes the errors made are based on mistakes of fact and sometimes they are based on mistakes of law. If clients come in time, these estate planning misfires can usually be avoided. If not, the consequences for the client’s family can be devastating. Surprisingly, wealthy celebrities are often the recipients of poor estate planning. When estate planning misfires occur, litigation among family members and with taxing authorities can be the ultimate result. The misfires discussed below involve celebrities, but the overarching issues relate to everyone.

Jessica Galligan Goldsmith is co-managing partner in the White Plains office of Kurzman Eisenberg Corbin & Lever, LLP. Erica Howard-Potter is a partner in the New York office of Pryor Cashman LLP. John S. Kiely is counsel in the New York office of McDermott Will & Emery LLP. Merrie Jeanne Webel is a partner at Webel Law, PLLC. Kristen A. Curatolo and David E. Stutzman are partners in the New York office of Seward & Kissel LLP. Samuel F. Thomas is an associate in the New York office of Seward & Kissel LLP.

Ray Charles: Even the Best Laid Result: At least a half dozen lawsuits Plans Can Go Awry were initiated between Charles’s children Background: Ray Charles was a prolific, and Adams for trademark infringement, blind, award-winning musician. Charles right to name and likeness, breach of fiduovercame a tragic childhood, the loss of ciary duties, unfair business practices, his sight, and drug addiction to rise to and Charles’s copyrights, among other musical stardom. He is on the short list of causes of action. Some actions were disartists to be inducted into both the Rock missed for procedural issues and some and Roll Hall of Fame and the Country were settled. Although Charles died on Music Hall of Fame.

June 10, 2004, various lawsuits continued Estate Plan: Charles was the father of 12 well into 2017. children by 10 different women. Facing a terminal diagnosis, Charles created trusts funded with $500,000 for each of his children. He communicated to each child that the trust for his or her benefit would be his or her sole inheritance from him, and the balance of his estate would pass to Charles’s charitable foundation. Charles’s longtime manager, Joe Adams, was named as trustee of the trusts, executor of Charles’s estate, and sole chairman, president, and treasurer of the foundation. Charles’s children believed that there would be more for them “down the line,” including the valuable right to license Charles’s name and likeness. Needless to say, Photo by Maurice Seymour, New York. Wikimedia Charles’s children and Adams did Commons. not get along.

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Getty Images

By Jessica Galligan Goldsmith, Erica Howard-Potter, John S. Kiely, Merrie Jeanne Webel, Kristen A. Curatolo, David E. Stutzman, and Samuel F. Thomas

September 15, 2019, at which time the divorce was still pending.

Result: Ocasek’s death terminated the pending divorce proceeding, which meant that Porizkova could not seek the equitable distribution she might have received in such proceeding. Her recourse (other than with respect to assets that passed to her by operation of law and beneficiary designation) was to assert that she was entitled to her elective share. Porizkova filed a Notice of Election on February 17, 2021, which asserted such right.

It is difficult for an executor or administrator to prevail on a defense of abandonment. This is true even in the case of a pending divorce action and can also be true when the spouses have lived in separate homes for many years.

For example, having a spouse depart the marital home is not abandonment if the spouses consent. The facts that emerged Ric Ocasek: Estate Planning in the media show that it would have been During a Divorce very difficult for the executor to prove Background: Richard T. Ocasek, a/k/a Ric abandonment. For example, Ocasek and Ocasek, was the frontman for The Cars and a producer of highly successful bands Porizkova continued to live in the same townhouse, such as Weezer and she checked No Doubt. He maron him the ried his third wife, night before Paulina Porizkova, in his death, and 1989, and their marit was Porizriage produced two kova who children. He also had found his four children from his body. two prior marriages.

Although Ocasek and Porizkova we are not separated in 2017, and privy to the a divorce action was exact details commenced. of Porizkova’s Estate Plan: On settlement August 28, 2019, with the Ocasek executed a estate, we new pour-over will do know that made no provithat Porizsion for Porizkova and Rick Ocasek of The Cars at The Riviera Theatre, Chicago, Illinois. Photo by swimfinfan. Photo source via kova’s claim stated that she was was settled not entitled to an elec- WikiCommmons: https://www.flickr.com/photos/ 12842055@N03/5756973070/ in October tive share because 2021, and she had “abandoned” her statements to the media imply that him. The elective share amount due the she ultimately received her elective share surviving spouse is one-third of the net amount.

Therefore, the very public, and estate (leaving aside very small estates); likely expensive, two-year dispute that folhowever, in New York and many other lowed Ocasek’s death does not appear to states, abandonment is a defense to have benefited any of the other interested the elective share (N.Y. Est. Powers & parties.

Trusts Law § 5-1.2(a)(5)). Ocasek died on Lesson: Even well-created estate plans can go awry when family members are disgruntled and left feeling disenfranchised. Ultimately, Charles’s estate plan remained intact, but only after much time, money, and energy were expended in the process. One way to minimize potential litigation following death is to separate the fiduciary roles by naming various people or institutions for each role. Leaving one person in a position of absolute power is often inadvisable. If practicable, clients should consider including at least one family member as a co-fiduciary so that all family members will feel adequately represented. In addition, when creating a lasting charitable legacy, it is advisable to involve at least some family members in order to minimize the suspicion and hurt feelings that often result in legal action.

Lesson: A client may be reluctant to leave the elective share amount to his or her spouse during a pending divorce proceeding. However, consider the position of the nominated executor, who may be pressured by the other beneficiaries to assert the abandonment defense. If the client is unwilling to include an elective share bequest, consider at least having a contemporaneous letter to the client in the file advising the client that it is very difficult to prevail with an abandonment defense, even during an acrimonious divorce proceeding.

Basquiat, Blockage Discounts, and Beyond: Intestacy and Estate (and Gift) Valuation Background: Jean-Michel Basquiat was the first major Black artist. He rose to fame in the 1980s and died intestate in 1988 of a heroin overdose at the age of 27. Basquiat was survived by his parents but did not have a spouse or any children. Under New York intestacy law, Basquiat’s parents inherited his estate equally (N.Y. Est. Powers & Trusts Law § 4-1.1(a)(4)). Basquiat left over 1,300 unsold works of art in his estate. Twenty years after his death, Basquiat’s mother, Matilde Basquiat, also died intestate. Basquiat’s father, Gerard Basquiat, and two sisters inherited Matilde’s estate and Gerard administered Matilde’s estate until he subsequently died in 2013.

In valuing Matilde’s estate, Gerard applied a significant blockage discount to the value of the one-half interest in Basquiat’s art owned by Matilde at the time of her death. The blockage discount was subsequently challenged by the IRS. Blockage discounts originated in the securities market. Such discounts are routinely applied when a decedent dies holding a large block of a single stock that must be disposed of immediately at death. If the disposition of a block of stock floods the market, it has the potential to reduce the stock’s value. To compensate for the immediate loss of value, the IRS often permits a blockage discount to the value of the gross estate, contingent on the quantity of the single stock in question. Blockage discounts are now often applied in the estates of well-known artists as the price of an artist’s work is often significantly reduced if many of such artist’s

Published in Probate & Property, Volume 37, No 6 © 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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works are released into the market for Greek shipping magnate who was worth After learning that their father had disinpublic sale simultaneously. many millions at the time of his death. herited them, Alexis and Sophocles issued Estate Administration: Sotheby’s origiZoullas had five children from two mara joint statement asserting, “we do not nally valued the Basquiat art owned by riages that both ended in divorce. Zoullas agree with many of his choices, particuMatilde at the time of her death at $36 and his first wife, Marianna Souyoutlarly those he made later in his life, when million. The IRS disagreed, and after zoglou, had two children: Alexis and he was unfortunately in a state of decline.” applying its own blockage discount, the Sophocles. Zoullas and his second wife, Lesson: Consider including mandaIRS claimed the value of the artwork in Susan Bates Zoullas, had three children: tory estate dispositions to children when Matilde’s estate Diana, Winston, and negotiating a divorce settlement agreewas worth $69 Andrew. In 2021, ment. Art, which can hold huge monetary million and issued Zoullas died peaceand emotional value, should be transanother Notice of fully during Christmas ferred with clear communication and Deficiency. Gerard week in New York at stored in a secured location. Public figdisputed the value the age of 84. ures should take measures to keep the of the artwork estiEstate Plan: During disposition of their estate private by using mated by the IRS, his life, Zoullas’s misa revocable trust. Finally, leaving a child applied his own management of his even a token acknowledgment may go a 46 percent blockart collection caused long way in smoothing over hurt feelings age discount, lots of family stress and protecting the entire estate plan from and claimed an and bad press. Zoullas being challenged.

IRS refund. After and his son Sophocles Gerard’s death, litigated with each Lessons from the Britney Spears the Basquiat famother over whether a Guardianship Saga ily valued Gerard’s Image inspired by the work of Basquiat.

Monet painting prom- Background: Britney Spears has been in estate at $45 mil- Getty Images. ised to Sophocles the public eye virtually her entire life, lion. The IRS by his grandfather making her solo debut as a singer at age issued a Notice of Deficiency based upon was actually a completed gift. The paint5 and achieving her first Number One the value of the artwork in Gerard’s estate. ing sat in storage for years before Zoullas hit at age 17. Following her meteoric rise, The IRS has made a confidential settlesold it to one of his own struggling comshe has continued to issue one platinum ment offer that is still pending. panies and then flipped it at auction to album after another. How she was forced Result: The blockage discounts applied a third party. Zoullas’s $10 million erotic into conservatorship against her will and in both Matilde’s and Gerard’s estates were art collection was also threatened and how she and her fans fought a battle to challenged by the IRS. An undisclosed damaged during a break-up with his then- escape it provide a disturbing example of settlement and stipulated value were girlfriend Stacy Cliett. Zoullas stored the the powers that conservatorships—espereached in Basquiat’s original estate, addi200-piece collection in his Florida home cially abusive ones—hold over those who tional taxes and penalties were due from that he shared with Cliett, and she and have lost their personal freedom and also his mother’s estate, and his father’s estate her new boyfriend moved the art continues to be in settlement proceedings to a warehouse, where it was ultiwith the IRS. mately recovered by Florida police.

Lesson: The Basquiat family applied Cliett was charged with grand larlarge blockage discounts and reduced val- ceny in the theft. After his death, uations to the Basquiat artwork, resulting Zoullas’s will gave all of his assets in several disputes with the IRS. A blockto his second wife Susan and made age discount can be a useful tool when no provision for his first wife Marian estate holds a large collection of art anna. Zoullas’s will also expressly by a single artist. Such discounts can sigdisinherited his sons Alexis and nificantly reduce estate taxes if applied Sophocles. intelligently. The overzealous application Result: The art litigation caused of such a discount, however, can trigger Zoullas to become estranged from an IRS audit and cost an estate both time his sons Alexis and Sophocles. Tenand money. sions ran so high after Zoullas’s death that family members pubNicholas Zoullas: Second lished two dueling obituaries in Marriages, Scorned Children, and the New York Times (with one com- Britney Spears performs at “NFL Kickoff Live 2003” Concert.

U.S. Navy photo by Chief Warrant Officer 4 Seth “Stolen” Art pletely omitting any mention of Rossman. Wikimedia Commons.

Background: Nicholas S. Zoullas was a Susan and their three children).

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provides lessons on how to avoid such situations.

Imposition of Guardianship: Spears was a mega-star by her 20s, but after a few well-publicized incidents raised questions among her family and advisors regarding her mental stability, she found herself in the grip of a court-appointed involuntary conservatorship or guardianship.

She was by no means a willing conservatee and tried repeatedly to free herself from this ordeal. Despite being a remarkably productive songwriter, singer, and performer—producing albums winning critical and commercial acclaim, conducting multiple worldwide tours, and becoming the top-earning woman in music—she was subject to the involuntary conservatorship for almost 14 years.

Result: As stories of her struggles trickled out, a concerted “#FreeBritney” social media campaign arose, followed by an Emmy-nominated documentary and damning news articles chronicling her plight. The public’s condemnation had an effect, and in late 2021 her conservatorship was finally terminated. Both the California legislature and Congress have taken note of the saga, and increased transparency and stricter accountability for guardianships may be in store.

Lesson: How can less-famous clients protect themselves when worried about or facing future incapacity? Three common, but sometimes overlooked or ignored, techniques, if put into place, can significantly reduce the risk that a guardian may be necessary or may be imposed.

First, under a health care proxy or medical power of attorney, clients can appoint someone to make health care decisions for them should they later be unable to make those decisions themselves, thereby reducing the risk that a court will name a guardian. Likewise, a durable power of attorney permits clients to appoint someone to act on their behalf for financial and estate planning purposes, again limiting the risk of court intervention. Finally, a funded revocable trust with appropriate successor trustee mechanisms is a beneficial way of avoiding court intervention. So long as the trust deed has provided for the appointment of a trusted successor (including backups or appropriate appointment provisions), the

management of the trust assets should continue without interruption should the client suffer a mental injury. These three documents can serve to keep control over a client’s affairs in the hands of the client and not in those of the court. So long as clients incorporate documents such as these as part of their planning, they will greatly reduce the risk of falling into Britney’s situation.

James Brown: Charitable Planning, Liquidity Planning, and Anticipating Challenges to James Brown performs at Tulane Stadium, New Orleans, 24 October 1970. Wikimedia Commons. an Estate Plan Background: James Brown, also known as “the Godfather of Soul” and “the Hardestfor an estimated $90 million to Primary Working Man in Show Business,” was a Wave Music, a New York company that singer, songwriter, and dancer who was specializes in marketing celebrity estates one of the most successful and influenand song catalogs, but even after the sale tial pop-music entertainers of the 20th the estate has continued to be embroiled century. He was inducted into the Rock in litigation. and Roll Hall of Fame in 1986. Brown Lesson: Ensure that clients update was a tireless performer who continued their documents upon the happening headlining concerts until his death from of a major life event, such as a marriage. congestive heart failure at age 73 in 2006.

Create records that will help a litigation Estate Plan: Brown’s will left the bulk of attorney to defend against challenges to his estate to a charitable trust providing an estate plan (on the basis of claims of scholarships for underprivileged children undue influence or lack of testamentary in South Carolina and Georgia. Brown’s capacity). Carefully analyze liquidity planwill did not mention his 36-year-old surning options such as life insurance, Code viving partner, Tomi Rae Hynie, who had Section 6166, and Graegin loans. Conallegedly married Brown in 2001. Brown sider encouraging clients to make lifetime, had reportedly signed the will 12 months rather than testamentary, charitable gifts. before he allegedly married Hynie.

Doing so is likely more tax-efficient and Result: Hynie filed a petition in South will also allow clients to benefit from the Carolina probate court claiming to be enjoyment and public prestige of seeing Brown’s surviving spouse, which, under the outcomes and social recognition of South Carolina law, would have entitled their philanthropy. her to set aside Brown’s will and receive a one-third “elective share” of his probate Conclusion estate. In 2020, though, the South Carolina The celebrities highlighted above each Supreme Court ruled that Hynie had not had an estate misfire. Some had no estate been legally married to Brown and thereplan at all, and some had plans that suffore had no rights in his estate. This was fered from poor drafting or poor planning. not the only legal obstacle preventing the In today’s increasingly varied and comclosing of Brown’s estate, however; more plex families, all persons, including but than a dozen lawsuits were filed over the not limited to wealthy celebrities, should years by people trying to lay claim to the protect their assets and their loved ones singer’s assets, which have been estimated by hiring competent estate planning to be worth approximately $100 million. counsel and devising thoughtful and comIn July 2021, the estate sold all of its assets prehensive estate plans. n

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KEEPING CURRENT P R O B AT E CASES FEDERAL JURISDICTION: Amount in controversy determined separately in consolidated proceeding. A beneficiary brought two cases alleging a breach of fiduciary duties by the trustee in state court, which consolidated the cases. The trustee removed to federal court on diversity grounds, and the beneficiary moved for remand. In Gray v. Gray, Civil No. 22-cv-560-LM, 2023 WL 3719834 (D.C. N.H. May 30, 2023), the district court for New Hampshire held that, in the absence of state law determining whether consolidation is a merger of the cases or an administrative procedure that retains their separate identities, the court must determine whether each case meets the amount in controversy requirement. The court also held abstention is not required under Burford v. Sun Oil Co., 319 U.S. 315 (1943), because the matters do not present “difficult questions of state law” the decision of which could disrupt New Hampshire policy applicable to trust administration, a policy that is not unique to the state, in part because the state has adopted the UTC. GIFTS: Gift of motor vehicle does not require transfer of title. Shortly before dying, the donor told a friend that the donor wanted the friend to have the donor’s motor vehicle and repeated that desire in a video call with the donee, the donee’s spouse, the donor’s child, and an employee of the donor who was directed to give the keys to the vehicle to the donee. After the donor’s intestate death, the donor’s child as

Keeping Current—Probate Editor: Prof.

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

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

administrator refused to turn over title to the donee. At the donee’s request, the district court ordered the administrator to deliver title, and, on appeal, the Colorado intermediate appellate court affirmed in In re Estate of Liebe, No. 22CA1076, 2023 WL 4055341 (Colo.

App. June 15, 2023). The court found that all the elements of an inter vivos gift were present and held that a formal transfer of title is not necessary to complete a gift of a motor vehicle.

JOINT TENANCY: Execution of sales contract severs joint tenancy.

The decedent and two other persons held real property as joint tenants with rights of survivorship. All three signed a contract to sell to third parties. The decedent died before closing. The decedent’s surviving spouse as executor of the decedent’s will brought a declaratory judgment proceeding seeking one-third of the proceeds of the sale.

The circuit court granted the summary judgment motion brought by the other two vendors, and on appeal, the Supreme Court of Alabama reversed in Upchurch v. Upchurch, SC-2022-0478, 2023 WL 2818554 (Ala. Apr. 7, 2023).

The court held that by entering into the sales contract, the sellers evidenced the intention to sever the joint tenancy. In addition, the sales contract said nothing about holding the proceeds in a joint tenancy.

JOINT TENANCY: Unilateral creation of joint tenancy by fee simple

owner is a completed gift. In a case of first impression, the New Jersey intermediate appellate court held in Branco v. Rodrigues, 297 A.3d 669 (N.J. Super.

Ct. App. Div. 2023) that a transfer of real property by a fee simple owner by deed to the owner and another as joint tenants is a gift to the other joint tenant when the owner dies first after recording the deed, even though the owner never informed the other joint tenant. The court affirmed summary judgment for the surviving joint tenant in a quiet title proceeding over the objection by the owner’s administrator that the transfer was an ineffective gift because of a lack of donative intent.

First, recording the deed raises a strong presumption of delivery; second, the creation of a joint tenancy is presumed to be a gift, and the presumption was unrebutted; third, the presumption of a gift means that acceptance is presumed; and, fourth, the donor could not unilaterally revoke the gift and recreate the fee simple.

JURISDICTION: Trustee who sued in name of the trust may amend pleading to sue as the trustee. In a dispute over a mortgage on real property held in trust, a related party was allowed to intervene and moved to dismiss. The motion was granted on the ground that the trust is not an entity capable of maintaining a suit. The court denied a motion by the trustee to amend the complaint, holding that under Oliver v.

Swiss Club Tell, 35 Cal. Rptr. 324 (Cal. Ct. App. 1963), the action was void ab initio and the statute of limitations had run. The trustee appealed and the intermediate appellate court reversed in Jo Redland Trust U.A.D. 4-6-05 v. CIT Bank N.A., 309 Cal. Rptr. 3d 339 (Cal. Ct. App. 2023). The court distinguished Oliver as being decided after the entry of judgment and emphasized the trial court’s power to determine its own jurisdiction.

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KEEPING CURRENT P R O B AT E

LIFE ESTATES: Tax arrearages are not waste. Reversing the Superior Court’s grant of summary judgment, the District of Columbia Court of Appeals held in Nelbach v. Nelbach, 291 A.3d 1129 (D.C. 2023) that because under DC law waste must involve some “lasting, detrimental injury to the property that compromises the remainder interest,” the life tenant’s failure to pay property taxes, the attachment of the lien for those taxes, and the issuance of a notice of delinquency will not support an action for waste under D.C. Code § 42-1601.

PERPETUITIES: Prohibition on sale of marital residence without agreement of both ex-spouses is void.

Husband and wife divorced. The separation agreement, approved in the divorce proceeding but not merged into the judgment and thus surviving as an independent contract, provides that the former marital residence, in which the parties are now tenants-in-common, can be sold only by mutual agreement and that the agreement is binding on the estates of the parties. The former wife filed a petition asking for partition, which the court dismissed on the grounds that the separation agreement was “unambiguous and binding.” In Bonilla v. Najera, 208 N.E.3d 736 (Mass.

App. Ct. 2023), the intermediate Massachusetts appellate court reversed, holding that the agreement created an unreasonable restraint on alienation because it is of indefinite duration and therefore violates the Rule Against Perpetuities; the restraint does not serve a worthwhile purpose; it applies to any attempt to transfer a party’s interest and affects an unlimited number of persons.

SLAYERS: Heirs related to the decedent through the slayer may inherit.

Like UPC § 2-803(f ), Delaware’s slayer statute, 12 Del. Code § 2322, requires that the statute be construed in accord with the state’s policy “that a person shall not be permitted to profit by that person’s own wrong.” In Matter of Estate of Cordray, 294 A.3d 99 (Del. Ch. 2023), the Delaware chancery court held that the statute does not prevent inheritance

as next of kin of the child of a slayer who killed the child’s other parent by the descendants of the slayer’s parents, the child’s grandparents.

TAX CASES, RULINGS, AND REGULATIONS ESTATE TAX: Corporation’s fair market value included life insurance proceeds intended for stock redemption. Two brothers were the sole shareholders of a building materials corporation. To help keep the corporation in the family and provide for a smooth transition upon a death, the brothers and corporation entered into a stock-purchase agreement where the surviving brother had the right to buy the shares. If the brother declined, the corporation had to redeem the shares.

The brothers always intended the corporation would redeem the shares. The corporation had life insurance on each brother to fund the redemption. When one brother died, his estate included his stock interest in the corporation. After an audit, the IRS assessed taxes on the decedent’s estate, stating the corporation had not been valued properly. The estate sued for a refund. The Eighth Circuit in Estate of Connelly v. U.S., 70 F.4th 412 (8th Cir. 2023), upheld the district court’s refusal to grant a refund and determination that the fair market value of the corporation should have included the life insurance proceeds.

ESTATE TAX: IRS can pursue lien of restitution-based assessment. The executor filed a false Form 706. After entering into an agreement with the Department of Justice, he had a restitution-based assessment. The IRS filed a Notice of Federal Tax Lien against the executor for the unpaid balance. The executor contested the notice through the collection due process hearing, claiming that he had paid part of the taxes owed that had not been credited, that he had adhered to the courtordered payment schedule, and that the notice was filed prematurely. The settlement officer placed the executor on currently-not-collectible status due to his income but sustained the notice of federal tax lien until the balance

could be satisfied. The Tax Court in Seggerman v. Commissioner, T.C. Memo.

2023-78 (2023), held that the settlement officer did not abuse discretion in sustaining the Notice of Federal Tax Lien. The lien was properly filed as statutory law allows the IRS to administratively collect criminal restitution and is not bound by the payment schedule set forth in the order for criminal restitution.

GIFT TAX: Adequate disclosure of gift on return starts the clock on the statute of limitations. The taxpayer was the policyholder of a life insurance policy issued in 2006. The policy was funded by stock and cash from an entity solely owned by the taxpayer. He then assigned ownership of the policy to several family members. In 2013, the taxpayer submitted a disclosure packet to the IRS Offshore Voluntary Disclosure program that included a gift tax return for 2006 to inform the IRS that he had made gifts of the EMG stock to those family members. The taxpayer identified four documents to support his disclosure: (1) the gift tax return, (2) a protective filing attachment, (3) Schedule F of Form 5471 for his 2006 tax return, and (4) the Offshore Entity Statement. The IRS disagreed concerning both the characterization of the gift as well as the timing of the gift and concluded that he made the gift in 2007 and did not adequately disclose the gift and that the period of limitations had not commenced. The Tax Court in Schlapfer v. Commissioner, T.C. Memo 2023-65 (2023), concluded that the taxpayer adequately disclosed the gift on his 2006 gift tax return and that the statute of limitations barred the IRS from assessing the gift tax.

LITERATURE BENEFICIARIES AS TRUSTEES: In Beneficiaries as Trustees: Here’s the State of Things, 36 Quinnipiac Prob. L. J. 277 (2023), Richard Ausness explains that although appointing beneficiaries as trustees is a common practice, there are serious risks, as demonstrated by cases of alleged fiduciary duty breaches. The article explores these risks and proposes

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KEEPING CURRENT P R O B AT E

drafting options to minimize the potential for litigation and protect the interests of all parties.

BUSINESS TRUSTS: Eric Chaffee questions whether business trusts should exist in Justifying Business Trusts, 64 B.C. L. Rev. 523 (2023). He argues “an unequivocal yes,” highlighting the growing popularity of index funds often organized as business trusts. Chaffee explains the critical role business trusts play in the US economy by (1) permitting diversification in investment, (2) promoting efficiency through regulatory competition, and (3) “revealing knowledge about how to regulate business activity as a spontaneous order system.”

CALIFORNIA—CONSERVATORSHIPS: In her Comment, Toxic: The Case of Britney Spears Sheds Light on Issues with California Conservatorship Laws, 52 Golden Gate U. L. Rev. 217 (2022), Berenice Quirino examines the issues associated with the highly publicized conservatorship of Britney Spears, which existed for nearly 14 years. Following the end of her conservatorship, California amended the law to address some of the glaring issues. These changes include guidance for court investigators reviewing a conservatorship to consider a conservatee’s preferences and a burden of proof requirement to show a conservatorship is still needed by clear and convincing evidence. Finally, she suggests additional amendments to protect the rights of persons placed under conservatorship.

FOREIGN LLCS: In Why Foreign Limited Liability Companies Are Ultimately More Protective Than Domestic Limited Liability Companies, 50 Est. Plan. 04 (2023), Eric Kaplan highlights foreign limited liability companies’ effectiveness as an asset preservation tool.

Practitioners often suggest using an LLC to safeguard a client’s assets from creditors because it traps liability at the entity level and provides more favorable tax treatment. Foreign LLCs can provide enhanced protection compared to domestic LLCs by avoiding

preemption issues, reducing the choice of law risks that could benefit creditors, and making it more expensive for creditors to pursue legal actions against a client.

HEIRS PROPERTY: Desiree Hensley highlights how heirs property disproportionately affects minority communities, hindering their wealth accumulation in the United States in Property Law and the Intestacy Entitlement, 85 Alb. L. Rev. 557 (2021).

Because this property is transferred to an heir outside of property law, it has no reliable record of ownership.

Over generations, the uncertainty of the title can make the property unmarketable. Hensley argues that property law’s negligence directly causes the heirs property problem of uncertainty.

Because property law has tools to manage this kind of uncertainty, like the Rule Against Perpetuities and the Rule Against Restraints on Alienation, states can introduce legislation to remedy this significant issue.

IOWA—DIRECTED TRUSTS AND DECANTING: In Modernizing Iowa’s Wealth Transfer Through Directed Trusts and Decanting, 70 Drake L. Rev. 667 (2023), Carter Albrecht examines Iowa’s 2020 Trust Code updates, specifically the introduction of decanting and directed trusts, as important steps to provide wealthy individuals with greater flexibility for their intricate estate planning needs. Albrecht argues that compared to South Dakota’s more advanced trust and tax provisions, however, Iowa still needs to modernize to retain wealthy and multi-faceted estate planning business.

MISSISSIPPI—ELECTRONIC WILLS: In her Comment, Electronic Wills: A Distinction Without Difference for Mississippi, 92 Miss. L. J. 799 (2023), Hannah Elliott advocates for Mississippi to adopt the Uniform Electronic Wills Act. She argues that the benefits of electronic wills, including increased accessibility and convenience, far outweigh the drawbacks and are necessary to modernize the legal system and decrease intestacy.

NEW YORK—END OF LIFE, ELDER ABUSE, AND GUARDIANSHIP: In End of Life, Elder Abuse, and Guardianship: An Exploration of New York’s Surrogate Decision-Making Framework, 38 Touro L. Rev. 45 (2022), Tristan Sullivan-Wilson, Deidre Lok, and Joy Solomon explore New York’s guardianship process for older adults facing elder abuse. They explain Article 81, which outlines the guardianship process, and the Family Health Care Decision Act, which guides surrogate decision-making for those who cannot make their own healthcare choices. Finally, the authors address the remaining practical barriers and provide recommendations for end-oflife care.

OHIO—EMBRACING ALTERNATIVE DISPOSITION METHODS: Aimee Sheetz advocates for Ohio to legalize alkaline hydrolysis and human remains composting to align with other states’ environmentally friendly and cost-effective alternatives to burial or cremation in A Call for the Legalization of Two Sustainable Means of Final Disposition in Ohio, 71 Clev. St. L. Rev. 915 (2023).

PURGING STATUTES: In Conditional Purging of Wills, 54 U. Rich. L. Rev. 275 (2023), Mark Glover discusses the majority and minority approaches to purging testamentary gifts of interested witnesses and examines whether a growing minority approach aligns with the policy goals of wills. Although most states void a testamentary gift made by an attesting witness, an increasing number of states are adopting the minority approach, which considers factors such as a testator’s intent, procedural considerations, or the substance of the gift. After a thorough analysis, Glover argues that this trend of conditional purging is “misguided” and suggests that policymakers should stick to the majority approach or carefully tailor conditional purging to align with the policy goals of wills.

REMOTE DOCUMENT EXECUTION: Alexander Anselment discusses in his Note, New York Executive Order 202.14: A Temporary Fix to a Temporary Problem, or a Framework to Change Estate Planning Document Execution?, 32 Alb. L.J. Sci. & Tech. (2022), the impact of the COVID-19

Published in Probate & Property, Volume 37, No 6 © 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

pandemic on estate planning requirements. Anselment focuses on New York Executive Order 202.14, authorizing the witnessing of documents via video conferences. He advocates adopting EO 202.14, or a modified version thereof, into New York state law to ensure that estate planning practices adapt to modern society.

IOWA allows the remote notarization of wills and codicils. The act also allows for wills and codicils to be executed in one or more counterparts by parties located in different locations with the multiple counterparts to be aggregated to comprise a completed will or codicil.

2023 Ia. Legis. Serv. H.F. 397.

SECURE 2.0 ACT: In The Secure 2.0 Act: Impact on Retirement Savings and Plans, 50 Est. Plan. 09 (2023), C. Lafond and Tom Adams explore the key takeaways of the Secure 2.0 Act, passed by Congress on December 29, 2022. They explain how one of the main reasons many Americans are not prepared for retirement is that they are either not offered a retirement savings plan by employers or decline to participate in one. To fix this problem, Secure 2.0 requires 401(k) and 403(b) plans to automatically enroll those eligible unless an employee opts out. Furthermore, this Act aims to offer increased tax benefits for small employers and greater flexibility for those saving for retirement.

IOWA requires tortious interference with inheritance claims to be joined with will contests. 2023 Ia. Legis. Serv.

H.F. 232.

LOUISIANA raises the age of adulthood under its version of the Uniform Transfers to Minors Act from 18 to 22 years old. 2023 La. Sess. Law Serv. Act 60.

MARYLAND conforms the time for making a portability election for state estate tax purposes to the same time period as is required under federal law.

2023 Md. Laws Ch. 713.

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

MICHIGAN updates provisions relating to the Michigan Statutory Will.

2023 Mich. Legis. Serv. P.A. 72.

NEVADA modernizes Power of Attorney for Health Care provisions and the statutory form. 2023 Nev. Laws Ch. 98.

TEXAS allows the creation of purpose trusts. 2023 Tex. Sess. Law Serv. Ch. 975.

TEXAS authorizes various probate notices to be given via other delivery services (e.g., UPS and FedEx) rather than registered or certified US mail.

2023 Tex. Sess. Law Serv. Ch. 205.

VERMONT enacts the Uniform Power of Attorney Act. 2023 Vt. Laws. No. 60. n

LEGISLATION ALABAMA provides for supported decision-making agreements as an alternative to guardianships. 2023 Ala. Laws Act 2023-134.

ALABAMA raises the amount of an uneconomic trust subject to termination from $50,000 to $100,000. 2023 Ala. Laws Act 20230176.

CALIFORNIA enacts an updated version of the Uniform Principal and Income Act. 2023 Cal. Legis. Serv. Ch. 28.

CALIFORNIA updates provisions relating to transfer on death deeds. 2023 Cal. Legis. Serv. Ch. 62.

FLORIDA creates the crime of exploitation of a person 65 years of age or older.

2023 Fla. Sess. Law. Serv. Ch. 2023-133.

GEORGIA requires the personal representative to send notices to beneficiaries within 30 days of the issuance of letters testamentary or letters of administration.

2023 Ga. Laws Act 346.

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November/December 2023

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By Janet M. Johnson

T

Property Insurance for Work Letters A lease can require either the landlord or the tenant (or both) to carry property insurance on a building (and permanent improvements or additions to that building). Multitenant office or retail leases typically require the landlord to carry property insurance on the building and often will not require the tenant to carry property insurance on anything other than its machinery, personal property, and equipment. The lease, however, will typically allow the landlord to charge the tenant for the tenant’s pro rata share of the premiums for the landlord’s insurance through pass-throughs of operating expenses (or increases in a base year amount of operating expenses) or common area maintenance expenses.

Janet M. Johnson is a partner at ArentFox Schiff LLP in Chicago, Illinois.

Published in Probate & Property, Volume 37, No 6 © 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 Projects, Part Two: Property Insurance

his is the second part of a two-part article on insurance for construction projects under commercial lease work letters in which either the landlord or the tenant is responsible for engaging the contractor to perform the work. This part focuses on property insurance for commercial buildings (property insurance), including tenant improvements to a tenant’s premises (leasehold improvements). Part One focused on commercial general liability (CGL) insurance.

For purposes of analyzing the appropriate types of property insurance in the context of two types of work letters discussed in the companion articles (see Marie A. Moore and G. Trippe Hawthorne, Lease Work Letters, Part One: When the Landlord Performs the Work, Prob. & Prop., May/Jun 2023, at 26; Marie A. Moore and G. Trippe Hawthorne, Lease Work Letters, Part Two: When the Tenant Performs the Work, Prob. & Prop., Jul/Aug 2023, at 44), this article assumes the landlord will carry property insurance on the building with limits sufficient to include the value of the leasehold improvements upon completionthat are of the types discussed in the companion articles. This article does not discuss property insurance issues that arise for construction of new buildings or significant additions to existing buildings, nor does it cover situations in which the landlord obligates the tenant to insure the leasehold improvements after. they are constructed under a work letter. Where the tenant insures the leasehold improvements, this is typically provided under a tenant’s property insurance policy.

Under an Insurance Services Office, Inc. (ISO) form property insurance policy (ISO Property Policy), coverage for leasehold improvements is called “improvements and betterments” coverage, but such coverage is beyond the scope of what is covered in this article.

Property insurance policies frequently also include coverage for loss of business income insurance that commercial leases typically require the tenant to carry or loss of rental value typically carried by landlords. This article discusses these coverages briefly in the context of “Builder’s Risk” insurance, which is a specific type of property insurance that may be appropriate to procure when constructing leasehold improvements under a work letter. This article will primarily focus on the ISO Property Policy and the ISO Builder’s Risk Coverage Form (ISO Builder’s Risk Form). There are many other types of property insurance and policy forms in addition to the ISO Property Policy and ISO Builder’s Risk Form, and insurers sometimes use manuscripted policies rather than standard forms, but space

does not permit a discussion of forms other than the ISO forms.

Property insurance is considered “first party” insurance. It applies to the insured’s own property and indemnifies the owner of the insured property (i.e., the landlord), but only for those losses covered by the policy and only to the extent of the limits of the policy. It does not cover property of third parties, although “Builder’s Risk” insurance under the ISO Builder’s Risk Form (builders risk insurance), which is discussed below, typically insures the interests of certain other parties.

Evidence of property insurance coverage is typically provided using a form provided by the Association for Cooperative Operations Research and Development (ACORD) called Evidence of Commercial Property Insurance. The most current form was issued in November 2011. As discussed in Part One of this article in the context of certificates of CGL insurance, the Evidence of Commercial Property Insurance form alone will not suffice as adequate evidence that the specified insurance has been procured because the form itself states it is issued as a matter of information only and confers no rights upon the person with the additional interest identified in the form. Moreover, it is subject to all of the terms, exclusions, and conditions of the policies themselves.

Instead, the party seeking evidence of insurance should request the declarations page and a list of the forms comprising the property policy, and then obtain copies of the relevant forms that are included in the property policy.

The ISO Property Policy The ISO Property Policy comprises multiple forms, but this article discusses only the key policy forms and endorsements relevant to work letters. A typical ISO Property Policy includes a declarations page that identifies the forms and endorsement forms constituting the policy and the properties insured, as well as the limits of coverage, deductibles, and sublimits under the policy; the policy period; and other important information. The ISO form declarations page is called the “Commercial Property Coverage Part Declarations Page,” CP DS 00 10 00.

As with all other ISO insurance forms, CP denotes the form is a Commercial Property form, the first two numbers designate the form number, and the last two sets of numbers indicate the month and year in which the form was adopted by ISO. Two separate ISO base forms are then combined with the ISO declarations page to form the key provisions of the ISO Property Policy. These two base forms include (1) the Building and Personal Property Coverage Form (currently CP 00 10 10 12), which describes the categories of property that the insurer will pay to restore or replace (the covered property), and (2) one of three different ISO “Causes of Loss” forms, which define the events that will trigger the insurer’s obligation to pay for restoration or replacement of the covered property. In addition to the declarations page and the two base forms, there are many other forms or endorsements that are or can be included within a complete ISO Property Policy, some of which are discussed in the portion of this article that discusses builders risk insurance.

Covered Property Under an ISO Property Policy, the covered property the insurer will pay to restore or replace includes items such as 1. The real property and items related to the real property, including the building, fixtures (including outdoor fixtures), permanently installed machinery and equipment, and the materials and equipment used to maintain or service the real property, and 2. The “business personal property,” including the insured’s furniture and fixtures, machinery and equipment, “stock,” and other personal property used in its business located in or on the building or structure described in the declarations page. A tenant’s business personal property includes its use interest in fixtures, alterations, installations, and additions made as part of a building or structure that the tenant occupies but does not own, as well as those that the tenant acquires or makes at its expense but cannot legally remove (called

Published in Probate & Property, Volume 37, No 6 © 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.

November/December 2023 25

“improvements and betterments”), but only if the building or structure is described in the declarations page.

Covered Causes of Loss Leases often speak in terms of “casualties” that are to be covered by the landlord’s or tenant’s property policy or property insurance called “casualty insurance.”

This terminology is not consistent with the terminology used in the insurance industry. Insurance professionals use the term “casualty insurance” to mean CGL insurance. The term of art used in the insurance industry to describe a type of covered cause of loss under a property policy (or special endorsement to such a policy) is a “peril.”

The three types of ISO “cause of loss” forms the insured can choose from are: (1) A Basic Form that covers only listed perils, including fire, lightning, vehicles, aircraft, and civil commotion (ISO Form CP 10 10 10 12).

(2) A Broad Form that provides Basic Form coverage as well as coverage for certain additional listed perils, such as structural collapse, sprinkler leakage, and losses caused by ice, sleet, or snow weight (ISO Form CP 10 20 10 12).

(3) A Special Causes of Loss Form that adds some listed perils to those covered under the Broad Form, and also covers “all risks of direct physical loss” except those perils that are specifically excluded (ISO Form CP 10 30 10 12).

In the distant past, the Special Causes of Loss Form was called an “All Risk” coverage form, although it never really covered “all risks.” A Special Causes of Loss Form provides the best coverage available today via standard form (i.e., non-manuscript policies) and is the type of property policy that landlords and tenants typically maintain for their property. Many types of perils are still excluded from Special Causes of Loss ISO Property Policies.

These excluded perils include matters such as ordinance or law, earth movement (earthquake, landslide, and earth sinking other than sinkhole collapse), governmental action, nuclear hazard, utility services, war and military action, water (flood and other water-related occurrences), and fungus (mold), wet rot, dry rot, and bacteria.

Many of these excluded coverages can be added by way of special endorsements to the base ISO Property Policy.

The Amount Insured A property policy’s declarations page sets out the maximum amount that an insurer will pay in any single occurrence (the coverage limits). For insured physical property (as opposed to loss of business income and rental value), the insurer will generally be required to pay either the replacement cost or actual cash value, depending on which option is selected by the insured.

The amount paid is limited, of course, by the insurance limits and perhaps by a coinsurance penalty if the limits of coverage are too far below the actual cash value or replacement cost of the property.

If replacement cost coverage is elected, the property policy will pay for the actual cost of making the repairs or replacing the damaged property with property of comparable material and quality, used for the same purpose, and at the same location (though the proceeds, once determined in this way, can be used to reconstruct at a different location). Most lenders will require their borrowers carry replacement cost coverage.

On the other hand, if actual cash value coverage is elected, the property policy will pay for the cost to replace with new property of like kind and quality (i.e., generally replacement cost) minus physical depreciation. Each component of the property may be subject to its own depreciation schedule, depending on the nature of the component, its useful life, the degree to which it was maintained, and whether it was replaced recently (e.g., a 50-year-old building with a two-year-old roof).

Even when replacement cost coverage is elected, separate sublimits are typically provided for certain coverages, such as the cost of demolition and disposition of the damaged portions of the property.

Separate sublimits and the overall limits should be set high enough to cover the expected amount of the costs, with no coinsurance penalty for underinsuring.

For example, when an insured purchases $10 million coverage on a building, the insured expects to be able to reconstruct the building with those proceeds. But if a significant portion of the $10 million

has to be used for demolition and debris removal costs, as well as for soft costs associated with preparing plans and specifications for the restoration work and obtaining permits, there may not be enough remaining to pay for the reconstruction.

Regardless of whether replacement cost coverage is elected, if the property is not actually repaired or replaced in accordance with the policy terms, the insurer will pay only the actual cash value. Also, even if the replacement cost coverage is elected, the insurer will initially pay only the actual cash value during the reconstruction process.

When the reconstruction is complete, the insurer will pay the additional amount that is required to cover the difference between the replacement cost and the actual cash value previously paid (up to the policy limits).

It is important not to understate the replacement cost because the ISO Property Policy includes a “coinsurance” provision that reduces the insured’s recovery. The starting point for the coinsurance penalty is the coinsurance percentage specified on the declarations page, generally 80 percent or 90 percent. That percentage is then applied as spelled out in the property policy in a manner that significantly reduces the recovery.

For example, if the replacement cost of the insured property is $5 million, the coinsurance percentage is 80 percent, the policy limits are $3 million, the covered loss is $1 million, and the deductible is $10,000, then the coinsurance penalty will be triggered. This is because the insured owner has insured its property for less than 80 percent of its insurable value (the $5 million value that could have been insured, multiplied by the 80 percent coinsurance percentage, equals $4 million—an amount greater than the $3 million coverage limits that were purchased). Once the coinsurance penalty has been triggered, under the ISO Causes of Loss Form, the insurer will: i. Multiply the value of the property at the time of the loss ($5,000,000) by the co-insurance percentage ($5,000,000 × 0.80 = $4,000,000), ii. Divide the stated limits of the coverage ($3,000,000) by the figure in (i) ($3,000,000 ÷ $4,000,000 = 0.75), iii. Multiply the amount of the loss ($1,000,000) before the application of the deductible by the figure

Published in Probate & Property, Volume 37, No 6 © 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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calculated in (ii) ($1,000,000 × 0.75 = $750,000), iv. Subtract the deductible from the figure in (iii) ($750,000 – $10,000 = $740,000), and v. Pay the result ($740,000) or the limits of the insurance, whichever is less.

The remainder of the loss amount ($260,000) will not be covered. One way for an insured to avoid the application of the coinsurance penalty is to be sure that the property is insured for its full insurable value at all times—or at least for the coinsurance percentage of this full insurable value.

In the example above, if the property had been insured for its $5,000,000 replacement cost (or at least 80 percent of that amount), the amount of the loss the insurer would have paid in this example would have been $990,000 (the $1,000,000 loss minus the deductible of $10,000).

Sophisticated property owners frequently avoid a coinsurance penalty by electing agreed value as an optional coverage on the declarations page of an ISO Property Policy.

If agreed value coverage applies, the insurer stipulates an agreed value for the insured property and suspends the operation of the coinsurance clause. The key is to be sure that a schedule of values for the property is agreed to by the insurer and incorporated into the policy. Often this will require periodic appraisals and corresponding adjustments to the property’s agreed value when the policy is renewed.

If the landlord has multiple properties, it probably insures those properties by means of a “blanket” policy. Under a blanket policy, the insured assumes that a fire or other peril will probably not affect more than one of the covered properties at a time, so the insured covers these properties in a bundle, which can result in a lower premium per property.

Typically, insurers issuing blanket policies include at least a 90 percent coinsurance requirement. To avoid application of the coinsurance penalty in a blanket property policy, the policy should include an agreed value endorsement that incorporates a statement or schedule of values fixing an amount for each location (and ideally also deleting the coinsurance penalty).

Even if the insured obtains agreed value coverage in its policy and incorporates a statement or schedule of values, the insured

should be sure that the policy does not also contain an ISO Form CP 12 32 06 07 Limitation on Loss Settlement—Blanket Insurance (Margin Clause) or its equivalent. A “margin clause” is an endorsement to a blanket policy that limits the amount of recovery for a particular property to a percentage of the stipulated value for that property, usually ranging from 1.05 percent to 1.20 percent. A margin clause effectively eliminates one of the key benefits of a blanket policy limit (allowing full amount of the policy limits to be available to pay for any one loss) and forces the insured to adequately cover the individual properties in its schedule of values.

Is a Property Policy Sufficient to Insure Leasehold Improvements or Do You Need Builder’s Risk Insurance?

In situations where the landlord is leasing space in an existing building for a tenant to build out its leased space under a work letter, or where the landlord of an existing building is constructing leasehold improvements for a tenant under a work letter, the landlord should evaluate its existing property policy coverages, exclusions, endorsements, and limits before construction commences. Such an evaluation is both necessary and advisable to determine whether the landlord’s existing property policy will adequately cover the leasehold improvements during construction and upon completion or whether builders risk insurance should be procured during construction.

Existing Permanent Property Insurance for Renovation of Existing Buildings An existing property policy may not automatically cover losses from damage to leasehold improvements. It all depends on the definition of “covered property” within the landlord’s existing property policy and the exclusions and endorsements to the policy. The ISO Property Policy includes “Completed additions” in its definition of covered property but only includes additions under construction and alterations and repairs to an existing building if they are not covered by other insurance. Thus, if builder’s risk insurance is procured by the tenant or its contractor, the landlord’s property policy will not

cover the leasehold improvements during construction because the builder’s risk insurance will be considered primary as long as it remains in effect.

When deciding whether the landlord’s existing property policy is sufficient to cover the leasehold improvements under construction, there are a number of things to consider. First, the landlord should confirm that the property policy will remain in effect for the duration of the construction of the leasehold improvements. If it will expire before the expected completion date, it is possible a gap in coverage will occur, particularly if the landlord switches carriers and coverages. Second, the landlord should review any “sublimit” in its existing property policy for additions under construction, alterations and repairs to the building and whether that sublimit will be sufficient to cover the anticipated cost of the leasehold improvements during construction. Finally, the landlord will need to determine that the overall limits of its property policy are high enough to cover the replacement cost of the building as improved by the leasehold improvements upon their completion. If not, the overall property policy limits may need to be increased. Failure to adequately increase the building’s replacement cost limits might result in the imposition of coinsurance penalties at the time of a loss occurring after completion.

If the landlord chooses to rely on its existing property policy, it should consider the additional “soft costs” that might be incurred if completion is delayed because of a fire or other covered cause of loss that occurs during construction of the leasehold improvements. These may include general condition costs for the extended period of construction and lost rental income if the tenant’s obligation to occupy the premises and commence payment of rent is delayed on account of a delay in completion.

Lastly, before relying on an existing property policy, the landlord should determine whether its existing property policy can be modified to include the interests of the contractor and subcontractors and whether the policy will limit or restrict the named insured status for the contractor and subcontractors to their interest in the portions of the building where

Published in Probate & Property, Volume 37, No 6 © 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 leasehold improvements are being constructed and will exclude them with respect to losses to their work caused by a covered cause of loss occurring in other portions of the building.

Builder’s Risk Insurance for Existing Buildings If there are issues with the landlord’s existing property policy, the landlord might procure a separate builder’s risk policy or add builder’s risk coverage to its existing property policy. Most builder’s risk insurance policies prohibit occupancy of the project or provide that coverage will terminate upon occupancy. This can be an issue if the premises in the building in which the leasehold improvements are being constructed is occupied during the work (e.g., because the work letter calls for construction in an existing tenant’s premises).

Careful coordination between the landlord’s permanent property policy and the builder’s risk insurance policy is required to avoid such problems. In addition, the landlord needs to understand what the insurer considers occupancy under the builder’s risk coverage. This can be more difficult if the tenant or the contractor performing the work under a work letter procures the builder’s risk insurance rather than the landlord.

Builder’s Risk Insurance Builder’s risk is a subset of first-party property insurance that provides coverage for all types of property under construction, including leasehold improvements.

As its name suggests, it is designed specifically for construction projects. The typical builder’s risk policy often will exclude coverage for existing buildings and for the tools and machinery for the contractor and subcontractors performing the work.

See Am. Bar Ass’n, Construction Insurance: A Guide for Attorneys and Other Professionals 252 (2011) (Construction Insurance Guide). Unlike, however, traditional property insurance policies, builder’s risk coverage “is, by its nature, temporary insurance. . . Coverage typically ceases upon completion of the project (or some short time afterward), even if that occurs before the policy’s stated term has run.” Id. at 270.

Builder’s risk insurance, like property

insurance on completed buildings, is considered “first party” coverage, meaning it provides coverage for the landlord. Unlike property insurance for a completed building, which typically covers only the owner of the building, builder’s risk insurance also provides coverage for other parties with an insurable interest in the insured building or leasehold improvements under construction.

Why Obtain Builder’s Risk Insurance?

Construction projects, by the very nature of what is occurring at the insured site, have a very different risk profile from that of completed buildings. For example, material and equipment are being delivered to the site, and other materials are being delivered that need to be stored before they are installed. The work is being performed by many different subcontractors at the site—many of whom are performing their portion of the work at the same time and in confined quarters.

Flammable processes (e.g., welding) are often conducted in areas where flammable materials are stored. This different risk profile means the premiums for builder’s risk insurance are determined based on different criteria than permanent property policies.

Also, during the work associated with the construction project, the value of the property insured is changing. Contractors and material suppliers perform work but aren’t paid immediately. If a fire occurs, not only are the contractors entitled to be paid for the work performed before the damage, but they will have to be paid to reconstruct the portion of the work that was damaged. Debris will have to be removed and disposed of before the reconstruction work can begin, and delays in completion of the project are likely to occur as a result of the damage.

Builder’s risk insurance is intended to transfer the risk of physical damage to the work caused by a covered cause of loss during construction from the owner, contractors, subcontractors, and sub-subcontractors to the builder’s risk insurer.

By providing the funding for necessary repairs or restoration, the work can move forward. The alternative would be to stop the work and litigate responsibility for the

loss between the parties, which is neither desirable nor practical.

What Does Builder’s Risk Insurance Cover?

Policy Forms for Builder’s Risk Insurance Builder’s risk insurance historically was written on an inland marine coverage policy form. Inland marine insurance originally was developed to provide coverage for goods lost or damaged while in transit over the oceans (today, this coverage is typically called ocean marine insurance). It later evolved to provides coverage for goods lost or damaged while in transit across inland waterways, and later still, overland by train, truck, or plane. In this way, inland marine coverage follows the goods as they move rather than insuring property in a fixed location on a particular parcel of real estate. By following inland marine policy coverages, builder’s risk insurance can provide broader coverage for losses occurring during construction than most permanent property policies. For example, builder’s risk insurance typically provides coverage on property that is destined to be included in the project, while in storage at the construction site, while in offsite storage, and while in transit.

Most insurers who underwrite builder’s risk coverage elect to draft and use their own policy forms, although ISO does have a builder’s risk coverage form (see, e.g., ISO CP 00 20 10 12) (ISO Builder’s Risk Form).

Space does not permit a discussion of the differences between the myriad of forms for builder’s risk insurance, and the precise forms available may vary by insurer and by state, so this article focuses on the ISO Builder’s Risk Form.

Key Elements of the ISO Builder’s Risk Form The ISO Builder’s Risk Form must be paired with additional forms to have a complete policy. To complete the policy and to know what types of losses are covered by the ISO Builder’s Risk Form, it must be paired with an ISO Causes of Loss Form (e.g., Basic, Broad, or Special). It can also be appended to an existing ISO Property Policy.

The other items that must be negotiated are the overall limit of insurance (i.e., the maximum amount of the insurance coverage) and any special sublimits (i.e., reduced amounts) for specific types of losses, such

Published in Probate & Property, Volume 37, No 6 © 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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as expediting expenses, expenses to re-erect scaffolding, fire department service charges, pollutant cleanup and removal, and coverage for personal property at temporary storage locations or in transit. The amounts of any deductibles and self-insured retentions are also important to understand because the work letter or contract with the contractor should specify the deductibles allowed and who bears the risk of any deductible or self-insured retention. Finally, it is important to know whether the policy contains a coinsurance provision that will apply if the overall limit on the amount of insurance is not equal to the estimated value of the project upon completion. Some of this information is included in the declarations page or schedule of coverages portions of the policy, but sometimes sublimits and coinsurance provisions are included within the policy itself (or both).

Typical Builder’s Risk Policy Coverages The ISO Builder’s Risk Form covers direct physical loss of or damage to “covered property” caused by or resulting from “covered causes of loss.” What covered causes of loss are excluded will depend on which causes of loss form is part of the policy (Basic, Broad, or Special).

Covered property under the ISO Builder’s Risk Form includes structures under construction. Damage to existing structures is typically excluded, but if the landlord carries an ISO Property Policy on the completed building and adds the ISO Builder’s Risk Form to that policy, both would be covered for the same covered causes of loss. The ISO Builder’s Risk Form also excludes, among other things, the contractor’s and subcontractors’ machinery, tools, equipment, and similar property that will not become a part of the permanent structure; property in transit (but coverage for this can be added); and property either left in the open and not stored inside the structure or stored offsite (but coverage for this should be added if the landlord or tenant and contractor contemplate significant amounts of materials and equipment to be installed as part of the leasehold improvements will need to be stored offsite).

Additional and Supplemental Coverages The ISO Builder’s Risk Form contains certain “Additional Coverages.” One such

If the expected completed value of the leasehold improvements increases during construction due to change orders, it is important to increase the coverage limits. coverage is for debris removal, but only for the insured’s property that is covered by the policy. If the tenant, rather than the landlord, procures the builder’s risk policy, the debris removal coverage will not apply to property owned by the landlord, unless the tenant is obligated to insure the landlord’s property and that property is considered covered property (i.e., part of the leasehold improvements) under the builder’s risk policy. It will not cover removal of debris from damage to portions of the building leased to other tenants or part of the existing structure owned by the landlord. This is because removal coverage for these other types of property should be covered by the landlord’s permanent property policy or possibly by the other tenants’ property insurance.

The ISO Builder’s Risk Form contains a complicated sublimit for debris removal.

It is limited to (i) 25 percent of the deductible under the policy, plus (ii) the amount paid for the direct physical loss for the covered property, but (iii) if no covered property has sustained direct physical loss or damage, the most the insurer will pay for covered debris removal is $5,000. The ISO Builder’s Risk Form, however, will pay an additional $25,000 for debris removal costs where either (a) the debris removal costs plus the amount paid for the direct physical loss for the covered property exceeds the limit of insurance on the covered property or (b) the actual debris removal expense exceeds 25 percent of the deductible plus the amount paid for direct physical loss or damage to the covered

property that sustained the loss or damage. Whether the amounts potentially available under these limits will be sufficient needs to be evaluated for each work letter.

Completed Value Form or Reporting Form Builder’s risk insurance can be written to cover a single project or multiple projects.

If written for a single leasehold improvements project, the completed value for the leasehold improvements will be used as the amount of the insurance. This type of coverage is usually what is procured by landlords because they more frequently are involved in constructing only one project at a time. But some landlords have multiple projects under construction at a given time, and if the contractor procures the builder’s risk insurance for the leasehold improvements, the contractor may have multiple projects under construction at one time. If so, a “reporting form” policy may be used.

If the builder’s risk insurance is written on a completed value basis, the premium is calculated and paid at the beginning of the policy period. If the expected completed value of the leasehold improvements increases during construction due to change orders, it is important to increase the coverage limits (and pay the corresponding increase in premiums) in order to remain fully insured and avoid a potential reduction in coverage by reason of the coinsurance penalty.

If the builder’s risk insurance is written on a reporting form basis, the insured must submit periodic reports (usually monthly or quarterly) of the values in place at the end of the reporting period.

The amount of the premium for each reporting period is then determined by multiplying the rate specified in the reporting form by the value of the work completed as reported for that reporting period.

The advantage of a reporting form basis is that the premium is lower initially than it is for the completed value policy because the premium is paid over time based on the values reported during the progress of construction and will increase with each report. The disadvantage of the reporting form is that if the amounts reported are inaccurate or late and a loss

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will not be covered occurs, it is likely a portion of the loss because the insurer will not pay more than the value stated in the last report filed before the loss. Moreover, the insurer will not pay more for any loss than the proportion the values last reported before the loss bears to the actual cash value of the covered property on the effective date of the report. Finally, the insurer will not pay more than the total limit of coverage even if the reported values exceed the limit.

Coverage for Stored Materials or Materials in Transit Ideally, all significant materials, whether stored onsite or offsite, should be covered. Otherwise, the parties will have to bear the risk of loss to those items before they are incorporated into the leasehold improvements. But the limits available for materials under the ISO Builder’s Risk Form are rather limited. The ISO Builder’s Risk Form covers only the insured’s building materials and supplies used for construction and only if they are intended to be permanently located in the building or within 100 feet of the property.

The ISO Builder’s Risk Form does not cover materials, equipment, or supplies in transit. In order to properly cover these items, whether they stored offsite or are in transit, a special type of endorsement or additional coverage must be obtained.

For smaller projects, as long as the construction contract does not obligate the landlord or tenant to pay for materials, equipment, or supplies until they are incorporated into the structure, the lower limits available in the ISO Builder’s Risk Form might be sufficient. If the leasehold improvements to be constructed under the work letter call for using long-leadtime items that are ordered and paid for in advance, additional coverage will likely be needed, especially if the items need to be stored offsite until they are needed.

If a loss occurs, there may be a dispute as to whether the property lost was actually “in transit” under the provisions of the applicable policy. In Waldan General Contractors, Inc. v. Michigan Mutual Insurance Co., a fire destroyed construction materials, worth almost $15,000, that had been packaged at the contractor’s warehouse and were awaiting shipment to

various job sites around the country. 577 N.W.2d 139, 140 (Mich. Ct. App. 1998).

Because the damage exceeded the limits under the contractor’s primary property policy on the warehouse, the contractor sought recovery under the inland marine builder’s risk/installation section of its property policy. The insurance company denied coverage under this section of the policy because the property was not in transit when it was destroyed. Ultimately, the appellate court found that the inland marine builder’s risk policy covered the property, holding it did not matter whether those materials were in storage following shipment or in transit.

The lesson to be learned from the Waldan case is if the project involves significant materials stored offsite (or even if building components are being fabricated at another location), an appropriate endorsement to the landlord’s or tenant’s property policy or builder’s risk insurance should be purchased to cover the expected cost of materials stored offsite regardless of whether they are in transit to the location, at the original location prior to shipment to the temporary location, or at the landlord’s building where the work is being conducted. Alternatively, an installation floater procured by the contractor or subcontractor to insure that specific item might be more appropriate and cost effective. Installation floaters are discussed in more detail below.

Duration of Builder’s Risk Policies Under the ISO Builder’s Risk Form, coverage will end on the earlier of the date that is 90 days after the work is complete or 60 days after the work is occupied in whole or in part or is put to its intended use.

If the leasehold improvements work is being done in an occupied building or an existing tenant’s premises while they are occupied, it will be important to address this with the insurance company to be sure this provision is not being violated.

If the work is in space not previously occupied by the tenant, care must be taken that the tenant does not take occupancy until the work has been completed unless the insurer has been notified and agrees to an extension of the time for completion of construction, including punch list items. The language of the

policy does not define when “construction is complete,” which makes it even more important to discuss the issue with the insurer in advance. Also, if the landlord has agreed in the work letter to allow the tenant access to the premises to install its own property (e.g., furniture, cabling, phones and other equipment) before the contractor’s work is complete, the work letter needs to make it clear this is not “occupancy” or “putting the space to its intended use,” and the builder’s risk insurance insurer needs to concur.

Whom Does Builder’s Risk Insurance Cover?

Named Insured vs. Additional Insured Typically, the persons named as insureds in a builder’s risk policy will include the owner (i.e., landlord), the contractor, and its subcontractors. The party or parties insured (both the first named insured and any other insureds named in the policy) must have an insurable interest in order to be covered. An insurable interest under a property policy means the person included in the coverage has a financial interest in the covered property (e.g., the building or the leasehold improvements) and will suffer some degree of financial loss if that property is damaged or destroyed.

Naming everyone involved in the work as an insured gives each insured the right to make a claim directly with the insurance company if the landlord (or other policy holder) fails to do so. If the landlord contracts for the leasehold improvements work under the work letter or the lease provides title to the leasehold improvements vest in the landlord during the work, the landlord will have an insurable interest throughout construction for direct physical loss or damage to the covered property (equal to funds expended for its own labor and supplies, as well as payments to the contractor and subcontractors and possibly material suppliers).

Regardless of whether the landlord or the tenant contracts for the work, the tenant has an insurable interest to the extent it makes payments to the landlord or contractor for some portion of the work. This frequently occurs in work letter construction if the tenant is responsible for costs in

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excess of the allowance provided by the landlord. The contractor has an insurable interest from commencement of construction to final acceptance and payment; its claim is for direct physical loss of or damages to the work incorporated into the leasehold improvements (including its labor costs, materials, and supplies) but not yet paid for by the landlord or tenant.

Likewise, subcontractors have insurable interest from the start of their portion of the work through final acceptance and payment.

Another reason for naming the contractors and subcontractors as insureds is to provide them with immunity from subrogation if their negligence is alleged to have been the cause of a covered cause of loss. Why is this? Because of the general principle that an insurer cannot subrogate against its insured. Using the phrase “and contractors and subcontractors of every tier” can also protect the party procuring the insurance from inadvertently omitting one of the persons who should be included in coverage, particularly a subcontractor that might not be engaged until after the business risk insurance has been procured. Finally, naming the landlord, contractor, and all subcontractors as insureds will typically satisfy the requirements in many standard form construction contracts that obligate the party carrying builder’s risk insurance for the benefit of all parties involved in constructing the leasehold improvements.

One concern sometimes voiced with a landlord naming the contractor and subcontractors as insureds is that if the policy is not divisible or severable, then coverage for all of the insureds could be invalidated if one of the insureds violates a condition or intentionally causes a loss or otherwise breaches the policy provisions. For example, the ISO Form Commercial Property Conditions (CP 00 90 07 88) excludes or voids coverage for misrepresentation, concealment, or fraud by the insured.

These concerns are why landlords or tenants procuring builders’ risk insurance often elect to name the contractor and subcontractor as additional insureds rather than as named insureds. Another way to avoid this problem is to be sure the policy has a “severability of interests,” “multiple insureds,” or “divisible

contract” clause. With these clauses, the policy is clarified so that each insured will remain covered no matter what “bad acts” might be performed by any of the other insureds.

Landlord’s Mortgagees In the ISO Builder’s Risk Form, the insurance company agrees to pay for covered losses or damages to each mortgage holder (including a trustee) “shown in the Declarations in their order of precedence, as interests may appear.” As a result, the landlord’s mortgage holder may be entitled to receive the proceeds under any builder’s risk insurance procured by the landlord.

The policy also provides for payments to mortgage holders even if the insurance company denies the insured’s claim and the insurance company has the right to step into the shoes of the mortgage holder once it pays the loss.

Mortgage holders are generally also named as loss payees. If so, the landlord may not control the use of the policy proceeds unless it negotiated this right in its loan documents. This issue also exists with respect to the landlord’s permanent property policy for the building.

What Is Not Covered by Builder’s Risk Insurance?

Exclusions from Covered Property The ISO Builder’s Risk Form does not include coverage for existing buildings, which means that without further modification, there will not be any coverage for damage to the landlord’s existing building when builder’s risk insurance is procured with respect to major renovations or additions. The decision in Gerald H. Phipps, Inc. v. Travelers Property Casualty Co. of America, 2017 WL 631637 at *1, 2 (10th Cir. Feb. 16, 2017), is consistent with this interpretation.

In the Phipps case, the court held the contractor’s builder’s risk policy, which expressly excluded “[b]uildings or structures that existed at the ‘job site’ prior to the inception of th[e] policy,” did not provide coverage for $804,661.76 in added costs the contractor incurred for environmental testing, asbestos

removal, removal and replacement of drywall, and installation of new fireproofing materials due to damage to the elevator shafts and stairwells from water from melting snow leaking into the building before the contractor could perform its intended construction work in those areas. The Phipps opinion is silent as to whether the owner’s property policy would cover the costs the contractor’s builder’s risk policy did not cover.

The rationale for excluding existing buildings from builder’s risk insurance policies is that the existing building will theoretically be covered for damage under the landlord’s permanent property policy. If the existing building is covered under an ISO Property Policy, the definition of “Covered Property” includes (a) additions under construction, alterations, and repairs to the building and (b) materials, equipment, supplies, and temporary structures, on or within 100 feet of the building, that are used for making additions, alterations, or repairs to the building, but only if they are not covered by other insurance. It also specifically excludes property that is covered under another coverage form within the policy or any other policy if that coverage form or policy describes the property more specifically, although it will cover the excess of the amount due under that other insurance (regardless of whether the insured can collect it).

This means if a contractor or tenant carries builder’s risk insurance for significant leasehold improvements to a landlord’s existing building, the landlord’s property policy insurer will look first to see if the contractor’s or tenant’s builder’s risk policy includes damage to the existing building, and if so, the insurer will expect the contractor’s or tenant’s policy to respond first to cover the loss. But, as noted above, if the contractor’s or tenant’s builder’s risk policy is the ISO Form, it is unlikely to cover damage to the landlord’s existing building unless the policy has been modified. If damage to the existing building is not covered by the contractor’s or tenant’s builder’s risk policy, the landlord’s property policy should respond, assuming the cause of the loss is a covered cause of loss under the landlord’s

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property policy. If the landlord procures the builder’s risk coverage for leasehold improvements being constructed under a work letter, the same issue would exist, but if the builder’s risk coverage is on the same ISO form as the landlord’s property policy with the same insurer, the landlord may be in a better position to minimize the likelihood of any gaps in coverage.

Exclusions from Coverage The exclusions from coverage in the ISO Causes of Loss Forms are not easy to summarize because they are found in multiple places within the policy forms.

There are fewer exclusions in the Basic Form and Broad Form policies because the coverage itself is narrower. Space does not permit a discussion of all the specific exclusions in this article. However, a few that are particularly relevant to work letter construction projects are discussed below.

Despite the standard exclusions in the various ISO Causes of Loss Forms, coverage for many of the exclusions can be added to the policy by endorsement. Two of the more common additional coverages added that are not discussed in this paper are earthquake (subject to high deductibles) and flood (generally excess over National Flood Insurance Program insurance) coverages.

Ordinance or Laws Exclusion A covered cause of loss often triggers the need to upgrade or modify portions of an existing building that were not damaged because of code change occurring after the building was constructed. Not all of these added costs will be covered because the various forms of ISO Property Policies typically contain some sort of an exclusion for “ordinance or law.” The ISO Builder’s Risk Form does not cover the added cost to comply with the laws and ordinances, but the ISO Building and Personal Property Coverage Form (CP 00 10 10 12) does include some very limited coverage for increased costs of construction and specifically provides that this coverage is not subject to the ordinance or law exclusion in the ISO Causes of Loss Form that is made a part of the ISO Builder’s Risk Form policy.

This seemingly conflicting provision between the ISO forms makes the coverage under an ISO Builder’s Risk Form policy very confusing. It is very likely the landlord and tenant will find some gaps in coverage, particularly for leasehold improvements work contracted for by the tenant in a partially occupied, existing building where other parts of the building outside the tenant’s premises are damaged by a fire that starts in the premises or in another portion of the building during construction. The parties should work closely with a risk manager or insurance professional to review the coverage limits and policy language carefully to minimize the risk of gaps in coverage.

For example, neither the ISO Property Policy or the ISO Builder’s Risk Form covers the cost of (1) complete demolition of a damaged building when demolition is required by governmental authorities, as is often the case where the building is damaged to the extent of more than 50 percent of its value (often where the building is “non-conforming”—meaning it no longer complies with the current zoning code requirements with respect to setbacks, size, height, etc.); (2) demolition of the undamaged portion of the building; or (3) adding features to a damaged building, sometimes including undamaged portions (for example, adding a sprinkler system, upgrades to electrical systems due to new code requirements, or new energy use reduction components) when the building was not previously required to contain these features (perhaps because it was grandfathered).

It is possible, however, to avoid the risk of these types of otherwise uninsured losses by adding ordinance or law coverage to the ISO Property Policy. This coverage can be added through an ISO CP 04 05 10 12 Ordinance or Law Coverage endorsement (ISO Ordinance or Law Endorsement). With this endorsement, the following will be covered if caused by the enforcement of any law regulating the demolition, construction, or repair of a building or zoning or land use requirements: (1) loss in value to the undamaged part of the covered property as a result of an ordinance or law requiring demolition of undamaged portions of a building

that has sustained covered direct physical damage, (2) the cost of demolition and clearing the site of the undamaged parts, and (3) the increased cost of construction to repair or reconstruct damaged portions and to reconstruct or remodel undamaged portions as long as the building is actually repaired, reconstructed, or remodeled.

The ISO Ordinance or Law Endorsement contains three types of ordinance or law coverage. Coverage A covers the loss in value of the undamaged portion of a building if the ordinance or law requires the demolition of the undamaged portion as well as the damaged portion. Coverage B covers the cost of demolishing and clearing the site if the ordinance or law requires the demolition of the undamaged portion as well as the damaged portion. Coverage C covers the increased cost of construction necessary to comply with current laws and ordinances (for example, by the addition of a sprinkler system). All three types of coverage are valuable. Coverages A and B are important to a landlord that must demolish all or part of the building to satisfy local codes. Coverage C is important when the landlord elects to rebuild and must include new improvements (such as a sprinkler system or upgraded electrical work) required by laws that were not in effect when the building was originally constructed.

Coverage under the ISO Ordinance or Law Endorsement is limited, however, to “the minimum requirements of the ordinance or law.” Losses and costs incurred in complying with recommended actions or standards that exceed actual requirements are not covered. This means, for example, if a landlord is required to install a fire sprinkler system in the entire building after a fire in a portion of the building, that cost would be covered, but not the cost to add a dry fire suppression system to an area of the building the landlord wants protected from water damage from a traditional sprinkler system if the applicable fire code does not require a dry fire suppression system for that area. Also, if the applicable law required the landlord to install a fire sprinkler system throughout the building prior to the fire, but the landlord had not yet complied with that requirement, the cost to install sprinklers throughout the building will not be covered under the ISO Ordinance or Law Endorsement.

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Exclusion for Damages Due to Failure to Take Reasonable Steps to Preserve the Property After a Loss All of the ISO Causes of Loss Forms exclude coverage caused by the “[n]eglect of an insured to use all reasonable means to save and preserve property from further damage at and after the time of loss.”

Thus, it is very important to immediately take action after the occurrence of a loss to prevent further deterioration or damage to the leasehold improvements under construction.

Exclusions for Defective or Faulty Design, Workmanship, or Materials Relevant to the construction of leasehold improvements, under the ISO Causes of Loss Forms (one of which will be a part of coverage under ISO Builder’s Risk Insurance), the insurer will not pay for loss or damage to the covered property caused by or resulting from faulty or inadequate or defective design, specifications, workmanship, repair, construction, renovation, or remodeling. The policy will, however, pay for the loss or damage caused by a covered cause of loss. Under the policy language, if an excluded cause of loss for faulty workmanship leads to a covered cause of loss (e.g., a leaking pipe leads to a collapse of the ceiling in the space below or a defect in a new electrical system causes a fire), the resulting loss or damage will be covered (e.g., repair of the collapsed ceiling or damage to the existing building due to the fire will be covered).

But repair of the defect in the pipe that caused the leak itself or the cost to correctly reinstall the electrical system will not be covered.

Additional Coverages to Consider Soft Costs Coverage and Limitations Landlords, tenants, and contractors all want to complete leasehold improvements construction projects on time.

Tenants need to occupy the project upon completion or landlords need to deliver the completed leasehold improvements to tenants who will occupy the space and commence paying rent to the landlord as soon as possible. If the leasehold improvements are damaged during construction, landlords (or tenants, to the

extent the landlord’s allowance does not cover all of the cost of the leasehold improvements) will incur costs or repair the damage. But additional expenses beyond those needed to repair the damage to the leasehold improvements might be incurred by the landlord or the tenant.

Many reasons exist for added costs after a loss. Subcontractors may have to rebid their contracts, and they may have to adjust their schedules for completing the work because of other projects. Some may no longer be available because of commitments made for other jobs. There may be additional design costs, particularly if codes or ordinances have changed and the leasehold improvements must now comply with them. The landlord may incur additional financing costs, and there may be increased costs for materials, particularly during periods of high inflation and rising construction costs, and the parties may even be unable to obtain required materials. Those involved in the construction and real estate industries are used to taking these added costs into account in budgeting the costs for their construction projects, but during 2021 and 2022, cost increases due to material and labor shortages meant much higher costs than would have been predicted based on trends during the past 40 years. Insurance companies may not consider these increases when it comes time to compensate an owner or contractor for its loss due to a fire or other peril covered by builder’s risk insurance even if the builder’s risk insurance is written on a replacement cost basis because the coverage under a property insurance policy is always limited by the limits of the policy.

The ISO Builder’s Risk Form does not specifically address these types of additional costs, which are typically called “soft costs” in the construction industry, that may be incurred in connection with a reconstruction or repair after a covered cause of loss under the policy.

Likewise, none of the ISO Causes of Loss Forms specifically delineate what might be included in the amount that can be recovered under the policy in the event of a covered cause of loss. The ISO Builder’s Risk Form merely states the insurer “will pay for direct physical loss of or damage to

Covered Property at the premises . . . caused by or resulting from any ‘Covered Cause of Loss.’” The line between what is considered a hard cost (or direct physical loss) versus a soft cost is often gray, and different insurers may take different positions. Likewise, insurers and loss adjusters may also disagree. Thus, it is dangerous to assume all insurance companies will interpret their policy language (which differs from company to company) in the same way when it comes to allowing “soft costs” to be included in the amount of the covered cause of loss.

At one time, ISO had developed a form of “soft costs” endorsement (IH 99 15 07 99) that could be appended to the ISO Builder’s Risk Form. Today, however, most insurers use their own manuscript forms when agreeing to cover soft costs of construction after a covered cause of loss. The landlord or tenant, depending on which one is contracting for the work, should carefully review the actual language to determine what is and is not covered and to make sure the soft cost coverage limits are adequate.

Business Income, Extra Expense, and Rental Value Loss Claims If the landlord is responsible for completing the leasehold improvements under the terms of the work letter, the landlord might suffer from a loss of rents because of a rent abatement to which the tenant might be entitled as a result of a delay in completion of the leasehold improvements and its inability to occupy the premises (although the landlord often simply extends the commencement and expiration dates for the lease term). Similarly, the tenant might not earn the anticipated business income from operations it plans to conduct in the premises because of its inability to occupy the premises. Also, other tenants in the building whose premises may become uninhabitable due to damage to other portions of the building might be entitled to a rent abatement under their leases. These losses can be covered if the landlord and the tenant carry insurance covering “business income” or “rental value.”

There are two ISO forms providing coverage for business income and rental

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value losses (ISO BI Forms). ISO Form CP 00 32 10 12 is used for lost business income (without extra expense), and ISO Form CP 00 30 10 12 is used for lost business income (with extra expense) (ISO BI EE Form). Both ISO BI Forms will cover loss of rental value if that coverage is specifically selected in the declarations page, but the ISO BI EE Form contains broader coverage for necessary expenses incurred by the insured that “would not have been incurred if there had been no direct physical loss of or damage to the insured’s property caused by or resulting from a Covered Cause of Loss.”

Loss of business income and loss of rental value coverage not only has a maximum insured amount as a coverage limit, but the recovery will also be limited to the loss suffered during a maximum period of time. Generally, this period is the “period of restoration.” Under the ISO BI Forms, the period of restoration begins 72 hours after the time the loss caused by a covered cause of loss to the insured premises occurs and ends on the earlier of the date on which the property “should be repaired, rebuilt or replaced with reasonable speed and similar quality” or the “date when business is resumed at a new permanent location.” If the damage is to buildings under construction or undergoing alterations or additions and delays the start of operations, the “period of restoration” begins on the date operations would have begun had the damage not occurred.

Sixty days is the maximum additional time allowed under the two ISO BI Forms (unless the policy is endorsed to provide for a longer period of time) for loss of business income, but this 60-day extended period will end at the date the insured could have restored operations “with reasonable speed, to the level that would generate the business income amount that would have existed if no direct physical loss or damage had occurred.” A similar provision applies to loss of rental value (as defined in the ISO BI Forms). Neither of the ISO BI Forms provides coverage if the loss of business income or rental value occurs due to “unfavorable business conditions caused by the impact of the Covered Cause of Loss in the area where the described premises are located.” The

parties should consider obtaining an additional coverage period of up to 90 to 120 days or longer, but this additional period must be elected, paid for, and shown in the declarations page.

As in the case of loss of or damage to covered property, an insured that underinsures its loss of business income or rental value by too great a percentage may find that its recovery under the ISO BI Form is reduced due to a coinsurance penalty. The insured can avoid this penalty by obtaining agreed value coverage, but obtaining this coverage usually requires submission of a business income worksheet estimating the business income or rental value and requires that the insurer make this estimate an agreed part of the policy. Regardless of whether the landlord or the tenant is procuring the builder’s risk insurance for the leasehold improvements to be constructed under a work letter, each of them needs to obtain business income coverage as part of its own insurance policies—ideally under a form that covers extra expenses. The most difficult part of procuring such insurance is estimating the amount of insurance that will be needed because the insurance company will never pay more than the limit of insurance procured no matter how long the actual delay lasts or how long the extended period of loss is extended by endorsement.

What Should the Work Letter or Construction Contract Say About Builders Risk?

Neither the landlord nor the tenant, depending on which one is contracting for the construction of the leasehold improvements, should rely on a contractor (performing work under a work letter) or a trade contractor (performing a more specialized scope of work that is less than a complete build-out of a tenant’s space, such as an HVAC contractor retrofitting a new heating/cooling or plumbing system) to procure sufficient builder’s risk insurance without specific contractual provisions. Specific requirements should be included in the work letter regarding what the policy and related endorsements must include, whom the policy must cover as additional insureds, the required limits of the policy, what must be provided as

evidence that the required coverages have been procured, and the repercussions for failing to procure the required coverages.

Replacement cost coverage is a necessity.

When the contractor must procure the insurance, the construction contract must include the same requirements and must specify what will be provided as evidence that the required coverage has been procured and what happens if the contractor fails to provide the required evidence.

Another insurance-related issue to be addressed in the work letter and construction contract is whether the parties will waive their respective insurers’ rights of subrogation. Generally, a party can waive only its own rights, so, of course, the insurer can waive its own right to make claims against another party. Today, however, an insurer’s rights of subrogation are customarily waived by its insured’s express waiver of claims in the lease, the work letter, or a construction contract, and this waiver is generally binding on the insurer.

If the parties conclude waivers of subrogation are appropriate, the work letter or construction contract language should contain two elements: (i) a waiver by each party of claims against the other party for all property damage that is insured by the specified form of property insurance policy and (ii) a waiver of each party’s insurer’s rights of subrogation against the other party. Waiving the insurer’s rights of subrogation is a bit of a shorthand way of describing a means by which the insured can cause the insurer to be bound by a waiver by the insured of its right to recover from another person who causes the loss or damage insured by an insurance policy, which, in turn, means the insured will be unable to exercise its contractual right to seek recovery from that other person.

Even the ISO Special Form Causes of Loss policies do not automatically include coverage for all types of property loss or damage.

For example, without a special endorsement or policy, neither the ISO Builders Risk Form nor the ISO Property Policy cover damage from flood and water backup from a sewer or drain or loss of business income or rental loss. This means the landlord and the tenant need to consider whether the waiver of claims includes both covered causes of losses and other types of losses that are not covered by the builder’s risk insurance. The conservative approach for the landlord and tenant is to have the waiver of claims apply only to

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the extent the loss or damage is covered by insurance, and if builder’s risk insurance is being procured, only to the extent of the insurance proceeds made available. This preserves the right of the party whose property has been damaged to recover amounts in excess of those covered by insurance from the party causing the loss. The parties can also consider whether the waiver of claims should apply against the party obligated to procure the coverage if it fails to procure the required insurance. Such a provision is intended to give an incentive to the party obligated to procure the required insurance coverage to actually obtain it.

Who Should Carry Builder’s Risk Insurance?

The building owner (the landlord in the case of leasehold improvements) typically procures the builder’s risk policy for the work. But, before determining who should procure the policy and serve as the first-named insured, the parties should understand the repercussions of allowing another party to procure the policy as the first-named insured. The first-named insured will control knowledge of notice of cancellation of the policy, renewal and nonrenewal issues, changes to the policy, return of premiums, deductibles, the total cost of the insurance, and the claims-handling procedures. As noted above, builder’s risk insurance typically includes all persons with an insurable interest in the construction project. If the landlord wants to control all of these issues, it would be better served by naming the others with an insurable interest as additional named insureds (if this is a possibility) or somehow distinguishing via endorsement which insured does control all of these aspects of the builder’s risk insurance.

On the other hand, for smaller projects, it may be appropriate for the contractor to carry the builder’s risk insurance. Also, where the tenant is contracting and paying for the bulk of the work, it may be appropriate for the tenant to procure the builder’s risk insurance for the leasehold improvements.

Installation Floaters As an alternative to relying on the landlord’s existing property insurance policy

or a separate builder’s risk policy, the landlord and tenant might consider insuring some of the risks of the work letter construction through the use of an “installation floater” procured by the contractor or one of its subcontractors. Typically, installation floaters are best used to insure the work of specialty subcontractors such as electricians, HVAC contractors, or others who can more easily separately insure their exposures outside of a landlord-, tenant-, or contractor-provided builder’s risk policy.

Some situations do call for reasonable and logical use of installation floaters.

They can be useful when a landlord or building owner undertakes renovation of specific specialty systems without use of a contractor and the existing property policy does not adequately cover the work, through the definition of “property” and “building,” or does not include the work required (often electrical, HVAC, fire suppression, etc.). The types of specialty subcontractors who do this type of work often have an annual “installation floater” policy with limits set on average or maximum installation exposures at any one site to cover their exposures until final completion of the work (typically defined by the landlord’s acceptance of the work) and final payment to the specialty subcontractor. In addition, if the builder’s risk coverage or existing property policy being relied upon to insure the leasehold improvements work does not cover property in transit and the construction contract calls for payment for material or equipment before installation, an installation floater may be appropriate because it typically covers property while in transit, while awaiting installation at the job site, and while being installed (although the coverage while in transit may be subject to a sublimit). Coverage under an installation floater will end when the work is considered to be complete by the terms of the floater. At this point in time, the landlord’s existing property policy would cover the installed equipment or material.

The landlord requiring the installation floater, and the contractor or specialty subcontractor procuring the installation floater, should review the language very carefully. Like any property policy, the

parties must ensure that coverage terms, the definition of property, and the covered perils insured under the installation floater are appropriate and adequate. For example, if the permanent property policy is written on a special causes of loss basis, the installation floater should cover those same perils and should include the other coverages added by endorsement to the landlord’s permanent property policy, such as flood and earthquake. They must also ensure that the limits of the insurance are sufficient for the actual exposure at the installation site. In addition, the parties should make sure the installation floater complies with the requirements of the work letter or construction contract with the contractor and contains a reasonable deductible that is not so high it nullifies the benefits of the floater.

Conclusion Understanding the appropriate types of insurance that should be procured and maintained during the construction of leasehold improvements under a work letter to a lease is no easy task.

CGL insurance and permanent property insurance or builder’s risk insurance are not the only types of insurance that may be required, but those other types are beyond the scope of this two-part article.

As noted in this part, the first decision to be made by a landlord (in consultation with its insurance broker or consultant) should be whether its existing property policy will be sufficient to cover potential damage to the existing building and the leasehold improvements while they are under construction or can be sufficient if the coverage limits are increased. If not, the second decision will be the amount of builder’s risk coverage that should be procured and who should best procure that coverage. The answer will depend on the nature and extent of the leasehold improvements and, as between the landlord and tenant, who will be contracting for the construction of the leasehold improvements; coordination between a landlord’s existing property policy and builder’s risk coverage; and what coverage the contractor or a specialty subcontractor might be able to provide. n

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November/December 2023 35

THE CORPORATE TRANSPARENCY ACT Getty Images

A High Altitude Pathway and Some Practice Considerations

By Harvey E. Bines Published in Probate & Property, Volume 37, No 6 © 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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T

he Corporate Transparency Act (the CTA), a 21-page component of the 1,482-page William M. (Mac) Thornberry Authorization Act, Pub. L. No. 116283 (Jan. 1, 2021), was enacted to respond to entity-enabled concealment by “malign actors . . . to facilitate illicit activity,” including “money laundering, financing of terrorism, proliferation financing, serious tax fraud,” and a number of other criminal and national-security-related activities, CTA § 6402(3) and (4), facilitated by multilayer entity formation, often in multiple jurisdictions. Because states do not require information about beneficial ownership, CTA § 6402(2), the CTA intends to “set a clear Federal standard for incorporation purposes” and “bring the United States into compliance with international antimoney laundering and countering the financing of terrorism standards.” Id. § 6402(5)(A), (E).

Section 6403 of the CTA contains all of the substantive provisions: definitions, information reporting, information retention and disclosure and coordination among agencies, notice (including by preenactment entities) of reporting obligations, bearershare prohibitions, a directive for outreach to the regulated, civil and criminal penalties, and a directive to Treasury to prevent evasion by use of taxexempt entities.

The “Beneficial Ownership Reporting Requirements” of the CTA amended Title 31 of the U.S. Code to add a new § 5336.

Except incidentally, the CTA does not serve needs of private parties in pursuing their economic and business interests. The CTA is a compliance regime intended to puncture the anonymity that accompanies the use of state-chartered entities, whose primary purpose historically has been to limit liability exposure and, secondarily, to protect the privacy of equity investors concerning deployment of their ownership interests acquired through

Harvey E. Bines is a partner at Sullivan & Worcester LLP in Boston. This paper is a revised version of the author’s panel presentation at the ABA RPTE National CLE Conference, May 12, 2023.

investment of capital and otherwise.

That secondary objective has become diluted over time, particularly in large part because banks and other financial intermediaries have their own customer identification and reporting obligations. Nonetheless, the vast majority of state-chartered entities are formed as private businesses or as private investment vehicles not subject to federal statutory disclosure obligations, and banks and other reporting intermediaries obtain information secondarily and thus incompletely. Accordingly, it is this segment of state-chartered entities that is principally targeted by the CTA. Despite the length of the proposing and adopting releases, the regulations implementing the CTA are not themselves voluminous, but because the CTA regime is novel, the proposal and comment process has been demanding. Near year end 2021, Treasury issued a 54-page Federal Register Notice of Proposed Rulemaking, 86 Fed. Reg. 69920–74 (Dec. 8, 2021) (the Proposing Release), which followed an earlier Advanced Notice of Proposed Rulemaking, 86 Fed. Reg. 17557–65 (Apr. 5, 2021). FinCEN adopted final rules 10 months later in 2022. 87 Fed. Reg. 59498–596 (Sept. 29, 2022) (the Adopting Release). FinCEN has pending proposed regulations that address permitted disclosure of beneficial owner information produced under the CTA. 87 Fed. Reg. 77404–87 (Dec. 16, 2022).

Despite the length of the accompanying releases, the final rules are relatively brief and mostly address those entities and individuals that must file, add content with respect to those exempted, and establish the content and timing of the reports required to be filed with FinCEN, subject to the civil and criminal penalties for noncompliance. As formally incorporated into CFR, CTA regulations will be designated 31 C.F.R. § 380.xxx.

As a new compliance regime, the CTA creates practice issues that the legal community must address. To take one prominent example, a statutory “Applicant” who establishes a new entity subject to CTA compliance takes on CTA responsibilities and liability

exposure that have been the subject of much preimplementation discussion.

See 31 U.S.C. § 5336(a)(2) (statutory definition). The Adopting Release, like the Proposing Release, contains multiple references to the identification and the responsibilities of an “applicant.” Given that that term is a trigger for reporting responsibility, law firms are presumably considering client and matter intake procedures. Additionally, because of the consequences of noncompliance, law firms are also addressing the development of CTA compliance provisions in corporate documentation, including formation, corporate proceedings, transaction documents, ordinary course business agreements, and opinions.

A critical element of the CTA and the implementing regulations is the definition of beneficial owner, which is the primary gateway for capturing the parties that must be identified to FinCEN. The CTA requires “each reporting company” to submit a report, CTA § 5336(b) (2)(A), to FinCEN that “shall . . . identify each beneficial owner of the applicable reporting company and each applicant with respect [thereto].” Id. § 5336(b)(2) (A). A person or entity that “directly or indirectly” owns 25 percent of a company’s “ownership interests” or “exercises substantial control” is deemed a beneficial owner. Id. § 5336(a)(3). That definition is quite open-ended and is further defined extensively and broadly in the regulations. 31 C.F.R. § 380(d)(i).

Worth noting especially is the reference in the Adopting Release, 87 Fed. Reg. at 59527, note 181, to the Committee on Foreign Investment in the United States (CFIUS) control provision “formal or informal arrangements to act in concert” as defined in the CFIUS regulations at 31 C.F.R. § 800.208(a). What would constitute “concert” to FinCEN is unclear and, consequently, for evaluation purposes at least, may include episodic, and not merely continuous, mutual engagement. The CFIUS control provision is in fact extensive and both broad and particular in its specifics. Accordingly, FinCEN’s reference at note 151, which also includes a reference to an Exchange Act definition (“similarly important matters”), should

Published in Probate & Property, Volume 37, No 6 © 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.

November/December 2023 37

The CTA regulations have three main objectives: (i) to provide content to the statutory terms “applicant” and “beneficial owner”; (ii) to set filing deadlines, including those relating to changes in beneficial ownership and corrections to previously filed information; and (iii) to specify the information that must be filed.

be considered as a potential, if not actual, expansion of the CTA regulatory definition. That definition alone includes senior officers, persons having appointment authority respecting senior officers or board control, and persons having “substantial influence over important decisions” of a company. 31 C.F.R. § 380(d)(1)(c).

A reporting company is “a corporation, limited liability company or other similar entity . . . created by . . . [a state or Indian Tribe] filing” or is “formed under the law of a foreign country and registered to do business in the United States [under the laws of a state or Indian Tribe],” except for specified categories of entities that are independently federally regulated, tax exempt, or substantial companies operating in the US, including Securities Act issuers and Exchange Act required filers, brokerdealers, federally regulated banks, credit unions and their holding companies, ’40 Act companies and federally registered investment advisers, insurance companies defined under the Advisers Act, registered or regulated commodity exchanges and commodities market and foreign exchange services, registered accounting firms, public utilities, and nonprofits (subject, however, to limitations). CTA, § 5336(a)(11)(i)–(xx).

Also excepted from the definition of “reporting company,” and arguably the key filter, considering the number of small business and one-off investment capital entities in existence or to be formed in the future, is “any entity” that (i) employs more than 20 fulltime employees in the US and has filed federal tax returns in the “previous year . . . demonstrating more than $5,000,000 in gross receipts or sales” on a consolidated basis and has

“an operating presence” in the United States or (ii) is inactive and not owned by “a foreign person.” Id. § 5336(a)(11) (xxi), (xxiii). FinCEN is also authorized “to add exemptions.” Id. § 5336(a)(11) (xxiv). Reporting companies must, within a year, furnish updated information if there is a change that would have required beneficial ownership reporting. 31 U.S.C. § 5336(b)(1)(D).

CTA § 5336(b)(2)(A) requires reporting entities to identify each “beneficial owner . . . and each applicant” by providing: (i) full legal name; (ii) date of birth; (iii) current address; and (iv) a “unique identification number . . . [which may be a] FinCEN identifier.”

An “acceptable identification document” is an effective US or foreign passport, US state or local ID, or US state driver’s license. Id. § 5336(a)(1).

A reporting entity must also name any exempt entity having a “direct or indirect ownership interest.” Id. § 5336(b) (2)(B).

Foreign pooled investment vehicles that, if domestic, would be exempted as financial institutions, or because registered under the ’33, ’34, or one of the ’40 Acts, must file “identification information” for a controlling person. Id. § 5336(b)(2)(C). The regulations exempt a pooled entity (whether domestic or foreign) that would be a reporting company but is advised by a federally regulated bank or credit union; a federally registered broker-dealer, investment company, or investment adviser; and an Advisers Act venture capital fund adviser, which is itself exempt.

The CTA regulations have three main objectives: (i) to provide content to the statutory terms “applicant”

and “beneficial owner”; (ii) to set filing deadlines, including those relating to changes in beneficial ownership and corrections to previously filed information; and (iii) to specify the information that must be filed. In addition, there are two innovations: (i) for filers, application for and use of a unique FinCEN identifier, and (ii) obligations of FinCEN concerning confidentiality with respect to collected information and limits on its authority to disclose information to domestic and foreign agencies and to financial institutions. The discussion accompanying the regulations when proposed requested comment on certain issues, encouraging companies to provide “highly useful information” supporting government and financial institutions in preventing money laundering, terrorist financing, tax evasion, and “other illicit activities,” 86 Fed. Reg. at 69921, but left unsaid were consequences or benefits that might follow from participation in information transmission.

As noted above, the regulations in their entirety constitute a single section of C.F.R. Key compliance issues include: (i) filing deadlines for initial, amended and corrected submissions, commencing January 1, 2024, (A) thirty days from regulatory effective date for new domestic and foreign entities; (B) one year for previously formed entities; (C) thirty days from the date an exempt entity becomes nonexempt; (D) thirty days from the date of changed circumstances (including estate settlement, loss of exemption, or gain of exemption); and (E) fourteen days from the date a “reporting company becomes aware . . . that any required information . . . was inaccurate when filed” (plainly much shorter than the statutory 90 days, after which statutory penalties apply); (ii) content for a reporting company:

Published in Probate & Property, Volume 37, No 6 © 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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November/December 2023

(A) name; (B) trade and d/b/a names; (C) address; (D) formation jurisdiction or, for foreign reporting companies, first registration jurisdiction; and (E) a TIN and EIN and, pending that, a D&B DUNS Number or a Legal Identifier Number. (iii) content for a beneficial owner or entity applicant: (A) name; (B) DOB; (C) address (business for “applicant” filers; otherwise residential); (D) unique ID number; and (E) image of (D).

A reporting company is required to submit the TIN of a consenting beneficial owner. 31 C.F.R. § 1010.380(b) (1)(F). There are certain special rules if, among other things, an individual would be a beneficial owner via an interest held by an exempt entity, is a minor who is a beneficial owner or is a decedent beneficial owner’s beneficiary, or is a foreign pooled investment vehicle. Entities and individuals that obtain a FinCEN number may use that number in lieu of information otherwise required of them in regulatory filings, but a preceding standard filing, containing the information listed above, is necessary to obtain a number. Id. § 1010.380(b)(4).

The regulations add (and somewhat limit) categories of companies exempt from the definition of reporting companies. Id. § 1010.380(c)(2). For example, as noted above, to gain exemption as a “large operating company,” an entity must employ more than 20 “full time employees” in the United States. The definitions of “full time employee” and “United States” are technical and specifically cross-referenced to provisions in 26 and 54 C.F.R. (Labor and Treasury). Further, the $5 million gross hurdle excludes revenues sourced outside the United States “as determined under Federal income tax principles.”

Id. § 1010.380(c)(2)(xxi).

Like the provisions addressing the

statutory large company exemption, other provisions in subsection (c)(2) of the regulations track, but add eligibility detail to, the statutory exemptions in 22 categories, including, for example, subsidiaries of exempt entities and entities that become “inactive” (if in existence prior to January 1, 2020).

Id. § 1010.380(c)(2)(xxii). The regulatory language is critical. Among other things, a beneficial owner (subsection (d)) is anyone who “directly or indirectly exercises substantial control.” Substantial control (subsection (d)(1)), is both extensively detailed, id. § 1010.380(d)(1)(i)–(iii), and openended, id. § 1010.380(d)(1)(iv): “Any other form of substantial control over the reporting company.” Likewise, “ownership interests” is both detailed, id. § 1010.380(d)(3)(i)[A]–[E], (ii)[A]–[C], and open-ended, id. § 1010.380(d)(3) (ii), (iii).

The CTA and the implementing regulations impose the primary reporting burden on the “reporting company” and the “applicant.” The statutory, civil, and criminal enforcement provisions and the attendant penalties, however, apply to any “person” willfully providing or attempting to provide “false or fraudulent beneficial ownership information” to FinCEN. 53 U.S.C. § 5336(h).

The prudent course would assume that a beneficial owner who provides false information to a reporting company— the vehicle for transmitting beneficial ownership information to FinCEN— is captured by the penalty provisions.

There is a statutory safe harbor that provides protection if corrections are submitted to FinCEN within 90 days of the company’s becoming aware of the falsity being corrected. Id. § 5336(h)(C) (i).

For those inclined to reflect on how the CTA and its implementing regulations might affect advice to clients, consider the hypothetical below: Angel Opportunity LLC (Angel) forms and manages limited partnerships, each having the objective of providing a means for pre-screened Angel investors to participate in early stage investment opportunities identified by Angel. Angel’s portfolio consists

of emerging technology companies and companies providing novel approaches to delivery of products and services.

Existing and future limited partnerships are, or will be, owned by some combination of the investors Angel has screened. The investors are US citizens and citizens of other countries, and Angel permits the investors it has screened to invest in each opportunity as limited partners personally or via an entity formed under the laws of the investor’s citizenship. Some of the limited partnerships in Angel’s portfolio have only three or four investor limited partners, others as many as 10.

The companies that Angel screens and submits to its investor universe are all US-domiciled.

Angel is paid a flat modest annual participation fee by each investor irrespective of whether an investor invests in any opportunities, plus carry-on distributions to an investor by companies in Angel’s portfolio. Successful investments generally lead to conventional venture fund financings, often through multiple rounds. Angel does not itself participate, but its investors in the company being financed may if permitted by the venture fund. Some companies in Angel’s portfolio are required to salvage value from an unsuccessful company.

Angel expects generally a one- to three-year period, and in some cases longer, before a company it offers to its investors will employ more than 20 people and earn revenues greater than $5 million. Most, but not all, opportunities in which Angel’s investors invest are located in the United States. Value for Angel’s investors in most of Angel’s successful investments are realized through sale of portfolio companies, although in some cases Angel distributes the equity involved to the limited partners invested in a particular company. From time to time, companies in Angel’s portfolio acquire or merge with other companies.

Angel’s in-house counsel asks what procedures and screens she should incorporate to assure compliance with the CTA. n

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November/December 2023 39

Federal Case Summaries

Arbitration The circuits are absorbing and implementing last year’s Supreme Court decisions, and foremost is the Court’s decision in Morgan v. Sundance, Inc., 142 S. Ct. 1708, 212 L. Ed. 2d 753 (2022), which held that whether a party has waived its right to arbitrate is examined under the same conditions as waiver of any other contract and an examining court may not add additional issues or conditions not generally applicable to waiver of other contractual provisions. The Third Circuit in White v.

Samsung Electronics America, Inc., Case No. 22-1162 (3d Cir. 2023), and the Ninth in Hill v. Xerox Business Services, LLC, Case Manuel Farach is a shareholder at Mrachek, Fitzgerald, Rose, Konopka, Thomas & Weiss, P.A., in West Palm Beach, Florida, and is the former Chair of the ABA’s Real Property Litigation Group.

No. 20-35838 (9th Cir. 2023), appear to have fully adopted Morgan.

The Ninth also held that the Federal Arbitration Act preempts a state rule that discriminates against the formation of an arbitration agreement, even if that agreement is ultimately enforceable, Chamber of Commerce of the United States of America v. Bonta, Case No. 20-15291 (9th Cir. 2023), and rejected a modified click-wrap provision in Johnson v. Walmart Inc., Case No. 21-16423 (9th Cir. 2023), when it held that an in-store purchase affiliated with an online purchase, which online purchase contained an arbitration agreement, is not required to be arbitrated when the in-store purchase did not contain an arbitration agreement.

Bankruptcy There are two big decisions of note in the bankruptcy context.

The Supreme Court held in MOAC Mall Holdings LLC v. Transform Holdco, LLC, Case No. 21–1270 (2023), that the statutory mootness provision of 11 U.S.C. § 365(m) is not jurisdictional and—absent a stay order—can be reviewed on appeal. This decision is concerning to many involved with real estate coming out of bankruptcy courts, as the statutory mootness principle gave comfort that the bankruptcy court’s decisions could not be reversed; that approach is not so clear after the MOAC decision. Also, of interest is In re LTL

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Getty Images

T

his article provides a brief summary of the most significant opinions issued by federal appellate courts during the period January through April 2023, which covered, among other topics, contracts, governmental takings, COVID shutdown orders, arbitration, bankruptcy, and consumer law.

Management, LLC, Case Nos. 22-2003, 22-2004, 22-2005, 22-2006, 22-007, 22-2008, 22-2009, 22-2010, and 22-2011 (3d Cir. 2023), where the Third Circuit held that the Bankruptcy Code applies only to those in financial distress, and no exceptions are made for companies seeking to protect brand image or to combine multiple suits into one forum. This is more of a front-end issue, so it should not be as concerning to investors and purchasers.

Sections 363 and 365 issues were not confined to the Supreme Court. The Fifth Circuit held in In re Palm Springs II, Case No. 21-11244 (5th Cir. 2023), that a lender’s knowledge of issues surrounding a property (an existing state court construction lien, state court litigation wherein the construction company is contesting the lender’s deed of trust, and bankruptcy adversary proceedings contesting its deed of trust) does not constitute knowledge of an “adverse claim” under 11 U.S.C. § 363(m) such that the lender is not a “good faith purchaser” entitled to statutory mootness protection. Similarly, a creditor who seeks payment from a debtor under one contract but whose assertion of uncured default arises from a separate contract in which the creditor has no contractual rights is not entitled to “cure claims” under 11 U.S.C. § 365(b)(1)(A), i.e., to be paid as part of the executory contract payments. In re George Washington Bridge Bus Station Development Venture LLC, Case No. 21-2050-bk (2d Cir. 2023).

Although bankruptcy filings are down nationwide, we recently have had several cases involving Chapter 11 issues. The Eleventh Circuit held that claim or interest holders are entitled to a new disclosure statement and another opportunity to vote when there is a modification to a Chapter 11 reorganization plan that materially and adversely affects the claim or interest holders. Braun v. America-CV Station Group, Inc. (In re America-CV Station Group, Inc.), Case No. 21-13774 (11th Cir. 2023). The Seventh Circuit held that a creditor that votes for plan confirmation— which plan reserves jurisdiction to the bankruptcy court to interpret and enforce the plan—and then seeks relief from state court in violation of the plan is properly sanctioned under Taggart v. Lorenzen, 139

S. Ct. 1795, 204 L. Ed. 2d 129 (2019), for its conduct. The Fourth Circuit held that a primary insurer was not a “party in interest” under 11 U.S.C. § 1109(b) and thus lacked standing to object to an asbestos company’s 11 U.S.C. § 524(g) plan of reorganization. In re Kaiser Gypsum Company, Inc., Case No. 21-1858 (4th Cir. 2023).

Strong-arm powers were also recently on the docket. The Seventh Circuit held in Warsco v. Creditmax Collection Agency, Inc., Case No. 22-1733 (7th Cir. 2023), that Barnhill v. Johnson, 503 U.S. 393 (1992) (federal rather than state law defines the meaning of “transfer” under 11 U.S.C. § 547 for determining a preference), requires overruling of the previous Seventh Circuit precedent of In re Coppie, 728 F.2d 951 (7th Cir. 1984). This was required because Indiana law determines when there is a “transfer.” In re Kimball Hill, Inc., Case No. 22-1724 (7th Cir. 2023). And the Seventh Circuit also held the standard of proof in turnover actions under 11 U.S.C. § 542 is preponderance of the evidence and not the clear and convincing standard. In re Dordevic, Case No. 22-2500 (7th Cir. 2023).

Chapter 13 questions were also prevalent. The Tenth Circuit held that the Chapter 13 Panel Trustee must return any payments made by the debtor in anticipation of the plan being confirmed if the plan is not confirmed. Goodman v. Doll (In re Doll), Case No. 22-1004 (10th Cir. 2023). And the Eleventh Circuit in Mortgage Corporation of the South v. Bozeman (In re Bozeman), Case No. 21-10987 (11th Cir. 2023), ruled that 11 U.S.C. § 1322(b) (2) (the Bankruptcy Code’s “antimodification” provision, which holds bankruptcy plans cannot modify home mortgages on a debtor’s principal residence secured by that residence) controls over the finality of a confirmed plan even if the creditor failed to object to the plan.

The question of finality is sometimes challenging in the bankruptcy context, and the First and Eleventh Circuits recently addressed the issue. The First Circuit held that the application of judicial estoppel in bankruptcy is not formulaic and “parties who fail to identify a legal claim in bankruptcy schedules may escape the application of judicial estoppel if they can show that they ‘either lacked

knowledge of the undisclosed claims or had no motive for their concealment.’”

In re Buscone, Case No. 22-9001 (1st Cir. 2023). Likewise, the Eleventh Circuit held in Esteva v. UBS Financial Services Inc. (In re Esteva), Case No. 21-13580 (11th Cir. 2023), that a district court may exercise its discretion and review interlocutory judgments and orders of a bankruptcy court, but a court of appeals has appellate review jurisdiction over only orders and final judgments entered by a district court.

Finally, the Sixth Circuit held in Digital Media Solutions, LLC v. South University of Ohio, LLC, Case No. No. 21-4014 (6th Cir. 2023), that notwithstanding Federal Rule of Civil Procedure 66’s heritage and historical receiver practice as a form “Chapter 11” before the adoption of the Bankruptcy Code, a court appointing a receiver under the Rule does not have the authority to issue a “bar order” prohibiting suits against third parties.

Contracts There were a few interesting contract cases during this period. First up, there were several OGM cases, and the Fourth Circuit held oil and gas leases that contain a “Market Enhancement Clause” permit lessees to deduct post-production costs from royalties paid to lessors. Corder v. Antero Resources Corporation, Case No. 21-1715 (4th Cir. 2023). In addition, the Eighth Circuit held that an oil well drilling agreement that gave the drilling company “[f]ull rights and access to use the Land as reasonably necessary for oration of all oil and gas activity,” which included using roads “across and through the] Land,” gave the drilling company the right to bring water trucks across the defined land in order to create an input well to extract oil from other wells. Brown v. Continental Resources, Inc., Case No. 22-1230 (8th Cir. 2023).

Indemnification also gave us authority to review. Rescap Liquidating Trust v. Primary Residential Mortgage, Inc., Case No. 21-2139 (8th Cir. 2023), held that a liquidating trust of a residential mortgage back securities intermediary is entitled to indemnification based on demonstrating breaches by the originator of the mortgage loans increased the intermediary’s risk of liability without demonstrating breaches on an individual loan basis. The

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November/December 2023 41

Tenth Circuit held that a sales contract that required the purchaser to indemnify the seller for “losses” and “environmental liabilities” associated with its asset purchase, which broadly defined “losses” to cover all losses and “environmental liabilities” to mean “any and all damage” for “all past, present and future obligations” arising from environmental matters, permitted the seller to draw on a standby letter of credit for indemnification. EFLO Energy v. Devon Energy Corporation, Case No. 22-6051 (10th Cir. 2023).

Corporate and Finance Lending There were a few corporate and finance cases. The Eleventh Circuit held that a reverse triangular merger does not constitute a “merger” for purposes of monies due under a consulting agreement. GSE Consulting, Inc. v. L3Harris Technologies, Inc., Case No. 22-10647 (11th Cir. 2023).

Of concern is Landcastle Acquisition Corp. v. Renasant Bank, Case No. 20-13735 (11th Cir. 2023), where the D’Oench, Duhme [& Co. v. Fed. Deposit Ins. Corp., 315 U.S. 447 (1942); 12 U.S.C. § 1823(e)] Doctrine, a form of estoppel, appeared again. Here the Eleventh Circuit held the Doctrine applies when the FDIC takes over a failed bank and sells it to a solvent bank such that evidence outside the failed bank’s records cannot be used to establish liability against the failed bank.

COVID The worst of the pandemic may be behind us, but the courts are still grappling with questions raised by COVID. The Third Circuit aligned itself with most courts and held that businesses’ inability to use their properties for their intended business purposes does not constitute “physical loss of ” property as that phrase is used in insurance policies. Wilson v. USI Insurance Service LLC, Case No. 20-3124 (3d Cir. 2023). Along the same lines, the Eighth Circuit held that the COVID-19 virus did not cause physical damage or alter property by attaching to physical surfaces and requiring cleaning, and accordingly, there is no insurance coverage. Lindenwood Female College v. Zurich American Insurance Company, Case No. 21-3738 (8th Cir. 2023). Finally, the Fourth Circuit held that being barred for 45 days, due to

The worst of the pandemic may be behind us, but the courts are still grappling with questions raised

by COVID. the pandemic, from entering the county in which your beach house sits does not constitute a Fifth Amendment taking as the property was not physically appropriated and no compensation is due under the ad hoc balancing test for the loss of use. Blackburn v. Dare County, Case No. 20-2056 (4th Cir. 2023).

Land Use and Takings There were a good number of land use cases this period, most ruling in favor of government. The Fifth Circuit held that the Supreme Court’s opinion in Knick v.

Township of Scott, 139 S. Ct. 2162 (2019), did not eliminate the defense of res judicata in cases where the issue has been conclusively litigated in state courts before suit was filed in federal court. Tejas Motel, L.L.C. v. City of Mesquite, Case No. 22-10321 (5th Cir. 2023). The Seventh Circuit held in Billie v. Village of Channahon, Case No. 22-1660 (7th Cir. 2023), that the Constitution establishes negative rather than positive liberties such that it prohibits certain government action but does not compel government action to those in distress, and, accordingly, there is no violation of the Takings Clause when a local government issues building permits for a housing development later found to be flood prone. The Fourth Circuit held that real estate development expenses incurred before issuance of a permit are not compensable under North Carolina law, even

though the expenses were incurred based on a county planning board’s previously approved “Preliminary Subdivision Plan.”

PEM Entities LLC v. County of Franklin, Case No. 21-1317 (4th Cir. 2023). A landowner who has the opportunity but chooses not to participate in local government property lien proceedings is precluded from claiming in his federal litigation that the Rooker-Feldman Doctrine does not apply to him because he was not a party to the state court proceedings. Bruce v. City and County of Denver, Case No. 21-1388 (10th Cir. 2023).

Continuing the government’s winning streak at Alive Church of the Nazarene, Inc. v. Prince William County, Case No. 21-2392 (4th Cir. 2023), the Fourth Circuit held that local government does not violate the Religious Land Use and Institutionalized Persons Act by requiring a church conducting agricultural operation on land zoned for agricultural use to meet the same requirements as other similarly situated agricultural uses. The Second Circuit held that New York City’s rent stabilization law neither effects a taking under the Takings Clause nor violates a landlord’s substantive due process rights. Community Housing Improvement Program v. City of New York, Case No. 20-3366-cv (2d Cir. 2023). The Fourth Circuit held that North Carolina’s Property Protection Act (which prohibits gaining access to the nonpublic areas of another’s premises and engaging “in an act that exceeds the person’s authority to enter”), N.C. Gen. Stat. § 99A-2(a), is modified to allow “legitimate” news gathering. People for the Ethical Treatment of Animals, Inc. v. North Carolina Farm Bureau Federation, Inc., Case Nos. 20-1776, 20-1777, and 20-1807 (4th Cir. 2023).

GEFT Outdoor, LLC v. Monroe County, Case Nos. 21-3328 and 22-1004 (7th Cir. 2023), held that content-neutral restraints on commercial speech—including restraints that are narrowly tailored to serve a government interest, leave alternative methods, and do not give government too much discretion—are constitutional.

Epcon Homestead, LLC v. Town of Chapel Hill, Case No. 21-1713 (4th Cir. 2023), held that claims under 28 U.S.C. § 1983 must be brought in three years, and, accordingly, claims that a municipality improperly required payment for low-income housing

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as a condition of receiving construction permits is barred by the statute of limitations when the developer made the payment, received building permits, and sued only after finishing the project. And Back Beach Neighbors Committee v. Town of Rockport, Case No. 22-1485 (1st Cir. 2023), ruled that Beachfront and adjacent owners can bring a “class of one” equal protection claim against the Town for allegedly not enforcing beach rules as it applies to them, but they must have been “intentionally treated differently from others similarly situated and that there is no rational basis for the difference in treatment.”

But it was not all doom and gloom for landowners, as Social Recovery, LLC v. City of Costa Mesa, Case No. 20-55820 (9th Cir. 2023), held that sober living home operators can satisfy the “actual disability” prong of the Fair Housing Act, the Americans with Disabilities Act, and the California Fair Employment and Housing Act on a collective basis by demonstrating that they serve or intend to serve individuals with actual disabilities, i.e., there is no requirement to provide individualized evidence of the actual disability of their residents.

Litigation There were several interesting litigation cases that affect real estate. The Supreme Court held in Axon Enterprise, Inc. v. Federal Trade Commission, Case No. 21-86 (2023), that the interagency-review processes of the Securities Exchange Act and Federal Trade Commission Act do not eliminate the district court’s jurisdiction over claims the process is unconstitutional. Also of interest, Colorado Bankers Life Insurance Company v. Academy Financial Assets, LLC, Case No. 22-1104 (4th Cir. 2023), set forth that the North Carolina state statute providing for an attorney fees award of 15 percent of the outstanding loan balance without regard to “the attorneys’ actual billings or usual rates” is enforceable. The Fifth Circuit held in In re KP Engineering, L.P., Case No. 22-20480 (5th Cir. 2023), that under Texas law—and by extension in bankruptcy court adversary proceedings in Texas—the pleading requirement for quantum meruit that there be no contract applies to proceedings against both

the contracting party and third parties who were not part of the contract but benefitted from the contract. The Sixth Circuit held that Tennessee law holds that a third party cannot sue for intentional interference with a business relationship if the alleged interference was embodied in a contract, and accordingly a prospective purchaser of real estate cannot state a claim for interference with a lender that refuses—as permitted by its lending contract—to approve the sale of real estate to a third party. BNA Associates LLC v. Goldman Sachs Specialty Lending Group, L.P., Case No. 22-5491 (6th Cir. 2023).

Regulatory There were a good number of regulatory and consumer cases, too, during this time period. Ward v. NPAS, Inc., Case No. 21-6189 (5th Cir. 2023), held that a party is not considered a “debt collector” under the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692–1692p, if the amount due was not in default at the time the debt was transferred to the party. Bassett v. Credit Bureau Services, Inc., Case Nos. 21-2864 and 22-1206 (8th Cir. 2023), held that a borrower who receives an incorrect dunning letter has not suffered a “concrete harm” and thus lacks Article III standing.

And Mauthe v. Millennium Health LLC, Case No. 20-2265 (3d Cir. 2023), held that an unsolicited junk fax does not violate the Telephone Consumer Protection Act, 47 U.S.C. § 227, if the service or product it advertises is free. Mader v. Experian Information Solutions, Inc., Case Nos. 20-3073 and 21-2171 (2d Cir. 2023), held that the Fair Credit Reporting Act’s requirement of reasonably accurate information, 15 U.S.C. § 1681e(b), is not violated when there is a legal inaccuracy due to substantial disagreement over whether debtor’s bankruptcy proceedings discharged his student loans. These cases may create significant defenses for businesses involved in consumer and regulatory litigation.

Consumers also won a few rounds.

Laufer v. Naranda Hotels, LLC, Case No. 20-2348 (4th Cir. 2023), is probably most prominent among these case as the Fourth Circuit aligned itself with the federal circuits, which hold that a “tester” (person who evaluates physical locations for ADA compliance and files suit against

those they contend are noncompliant) has Article III standing to file suit. Consumer Financial Protection Bureau v. Law Offices of Crystal Moroney, P.C., Case No. 20-3471 (2d Cir. 2023), held that alleging the Bureau’s actions were unlawful under Seila Law LLC v. CFPB, 140 S. Ct. 2183, 207 L. Ed. 2d 494 (2020) (statute that provided the director could not be removed by the president other than for cause is unconstitutional), requires “but-for causation,” i.e., proving the agency would not have taken the action but for the president’s inability to remove the director is also consumerfriendly. Likewise, Royal Palm Village Residents, Inc. v. Slider, Case No. 21-13789 (11th Cir. 2023), held that Florida Statute § 723.068 (prevailing parties in litigation over the Mobile Home Act are entitled to attorney fees) does not apply to a voluntarily dismissed amended complaint that alleged violations of the Act but did not include claims for violations of or requests for relief under the Act or seek to enforce compliance with the Act. And Walters v.

Fast AC, LLC, Case No. 21-13879 (11th Cir. 2023), held that an aggrieved party has standing to claim a violation of the Truth in Lending Act against a defendant lender when the party violating the Act was the agent of the lender.

Title There were two title cases, both involving the Quiet Title Act, 28 U.S.C. § 2409a(g).

The Supreme Court held in Wilkins v.

United States, Case No. 21-1164 (2023), that the 12-year bar of the Quiet Title Act was a nonjurisdictional claims-processing rule, and Pueblo of Jemez v. United States of America, Case No. 20-2145 (10th Cir. 2023), held that a federally recognized Indian tribe does not lose its aboriginal claim to federal lands under the Quiet Title Act by not using the land to the exclusion of other tribes.

Conclusion The Supreme Court is behind its historical average of opinions issued at this point in the term, but there were a good number of cases this past period. Of note are the good number of bankruptcy and land-use cases, an interesting contrast between distressed properties and properties in development. n

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November/December 2023 43

THE LAW OF A LAST REQUEST

C Bury Me with My Favorite Toy, Part 1

By William A. Drennan

William A. Drennan is a professor at Southern Illinois University Law School and a former editor for the Books & Media Committee of the Real Property, Trust and Estate Law Section of the ABA.

Published in Probate & Property, Volume 37, No 6 © 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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Getty Images

an you take it with you? At least into your casket?

Casket manufacturers now mass-produce caskets with “memory drawers” and “secret compartments” that can hold prized possessions and mementos. See Key Features on Which to Base Your Choice of a Casket, ToCanvas (Jan. 27, 2020), https://www.tocanvas.net/key. How can estate planners design and draft to help clients who want to take a cherished item along? This first article discusses potential client motivations, actual burial fact patterns, and techniques for an estate planner to address the one reported judicial opinion on this issue, which concluded the direction was unenforceable because it encouraged grave robbing. The second article, in a future issue, will focus on why this is a particularly challenging practical and legal area and describe potential design and drafting options for addressing the major legal issue beyond grave robbing—whether these directions are unenforceable under the public policy doctrine because of economic waste.

Motivations for “Taking It with You” Regardless of the economic or political system, human existence requires the accumulation and use of personal property. Contemplating death and complete detachment from all belongings can be difficult, and “people seem to get a lot of utility during life from the thought that they will be buried wearing a wedding ring or that a particular sentimental item will be deposited in their casket.” Lior Joseph Strahilovitz, The Right to Destroy, 114 Yale L.J. 781, 802 (2005).

Archeologists tell us that people have been burying the dead with belongings for at least 10,000 years. Some ancients believed, with the last gasp, the spirit rose from the mortal remains and sojourned skyward, like breath visibly rising on a cold winter’s day, the body’s way of “giving up the ghost.” And to permit the deceased to “take it with them,” these ancients burned the deceased’s personal property so it would rise with the smoke, to unite with the ghost for the great journey beyond. See William J. Bowe & Douglas H. Parker, Page on the Law of Wills 39 (2003). Famously, the Egyptians of antiquity buried important dead with practical and priceless possessions to aid them in the afterlife.

Some modern people also want to “take it with them,” and there is great diversity regarding the “it.” “Most people possess certain objects they feel are almost part of themselves.” Roger Angell, “This Old Man,” New Yorker, Feb. 17, 2014. Property law scholars assert that items of property can become part of our “personhood.” See Deborah S. Gordon, Mor[t]ality and Identity: Wills, Narratives, and Cherished Possessions, 28 Yale J. L. & Human. 265, 271 (2016).

Such feelings may be criticized or condemned as “illogical” and “mere sentimentality,” but experts assert that sentimentality is part of a fulfilling and emotionally balanced life. See, e.g., Christian Maciel, 10 Reasons Why People Who Are Sentimental Have Beautiful Lives (Apr. 8, 2015), www.lifehack.org.

In some areas, the law acknowledges the value and importance of sentiment. In gift law, courts often recognize

that engagement rings hold extra value related to the corresponding actual romantic and marital relationship. If an engagement ends without marriage, a court may require that the recipient return the ring despite being entitled to keep all other completed gifts from the rejected (or rejecting) fiancé or fiancée.

See, e.g., Cooper v. Smith, 800 N.E.2d 372 (Ohio Ct. App. 2003); but see Albinger v.

Harris, 48 P.3d 711, 720 (Mont. 2002) (allowing the donee to keep an engagement ring even if no marriage occurs in recognition of expenses likely incurred in planning the wedding).

Also, in determining the remedy in a breach of contract case, a judge or jury calculating money damages may increase the amount because of the sentimental value of the item. See Windeler v. Scheen Jewelers, 8 Cal. App. 3d 844 (1970) (granting money damages for a family’s emotional distress when a jeweler lost the family’s gemstones while resetting them). In addition, a court may grant specific performance because the sentimental attachment makes the item unique. See Margaret F. Brining, “Money Can’t Buy Me Love”: A Contrast Between Damages in Family Law and Contract, 27 J. Corp. L. 567, 577 n.58 (2002).

Real Life (and Death) Situations with Grave Goods Burying people with an item is so common there is a term for the items— “grave goods.” “The practice of placing grave goods with the dead body has . . . an uninterrupted history beginning [at least 10,000 years ago].” Grave Goods, Wikipedia, https://tinyurl. com/44xf3ft6.

Today, industry insiders indicate that many decedents are buried with valuables. See Marshall Jacobs, Can Things Be Placed in a Casket?, Funerals (May 20, 2017), https://www.thegardens.com.

“It might seem unthinkable to bury [a corpse] . . . with an item of value . . . but many people do,” and the items can include “money, jewelry, and family heirlooms.” Fioritto Funeral Serv., Top Ten Items to Place in a Casket (Sept. 5, 2019), https://fiorittofuneralservice.net.

After noting a trend toward “more

creative ceremonies,” with people being buried with musical instruments, hobby items, sports memorabilia, and more, one manager of funeral services “said she could write a book on what she had seen.” Cristy-Lee Macqueen, You Can Take It with You! The Unique Items People Are Buried With, ABC Tropical N. (June 14, 2019), www.abc.net.au/ news/2019-06-15. See also Strahilovitz, supra, at 800–01 (“[Under] prevalent social norms, . . . people are often buried wearing their wedding rings, expensive clothing, and other items of considerable value.”). Sometimes the decedent directs the burial of these grave goods, and sometimes surviving family members or friends add these items on their own initiative.

Cars & Motorcycles. A “famous Ferrari” case garners a great deal of the ink on this topic. Flamboyant Beverly Hills oil-heiress and socialite Sandra Ilene West often is pictured crosslegged, sitting (or sliding down) the hood of one of her three Ferrari autos.

She directed in her handwritten will that she be buried in one Ferrari, in a lace nightgown, “with the seat slanted comfortably.” Madelyn Mendoza, A Beverly Hills Socialite Was Entombed in Her Ferrari in San Antonio 44 Years Ago, MySA (May 26, 2021), https://tinyurl. com/2shbjwhn; Jim Motavalli, You Can Take It with You, if the Grave Is Deep Enough, N.Y. Times, Feb. 24, 2022 (discussing several actual and alleged car burials). Inspired by a different “bury me in my car” true story, blues legend Stevie Ray Vaughan had a song highlighting a “Cadillac coffin.” See Benjamin Hunting, Loving Your Car to Death: Can You Be Buried in Your Favorite Vehicle?, Motortrend, Aug. 14, 2022.

Predictably, others choose to be buried astride their motorcycle. See Shona Hendley, Four Unique Stories of People Who Were Buried with Their Vehicles, carsales (Nov. 6, 2022), https://tinyurl.com/ a2vjserp.

Jewels & Designer Clothes. As discussed in more detail below, apparently the only reported judicial opinion on the legality of this sort of last request involved a desire to take along “diamonds and other jewelry.”

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November/December 2023 45

Advice columnists and bloggers advise removing the jewelry shortly before the casket is sealed, sometimes expressing concern that the undertaker will steal the jewelry.

Meksras Estate, 63 Pa. D. & C.2d 371 (C.P. Orphans’ Ct. 1974). Although the executor refused to grant that last request, and the court declared it unenforceable because it would encourage grave robbing, commentators note that people routinely bury the dead with their engagement and wedding rings with no legal challenge at all. See, e.g., Strahilovitz, supra, at 802. While beneficiaries litigated other aspects of Leona Helmsley’s last will, her direction to be “interred wearing [her] gold wedding band (which is never to be removed from [her] finger)” apparently went unchallenged. See Last Will & Testament of Leona Helmsley, www.jdsupra.com-post-fileServer-pdf.

Some advice columnists and bloggers advise removing the jewelry shortly before the casket is sealed, sometimes expressing concern that the undertaker will steal the jewelry. See, e.g., Decide Whether to Remove All Jewelry of Value Before Burial, https://executor.org/plan/ plan-manage-the-funeral.

Reportedly, Whitney Houston was buried wearing $500,000 to $750,000 worth of jewelry, without legal challenge, but there were great concerns about grave robbing. Ted Casablanca & Alyssa Toomey, Who’s Protecting Whitney Houston and Her Jewels?! (Feb. 28, 2012), www.eonline.com/news/297254; Lucy Buckland, Whitney Houston’s Body to Be Encased in Concrete, Daily Mail (Apr. 30, 2012), https://tinyurl.com/bdhpdvee.

She also wore designer clothing including glittering golden slippers. Legendary entertainer Sammy Davis Jr. was buried with $70,000 worth of jewelry, but his wife subsequently had his body exhumed and removed the jewels to pay tax debts. Kate Meyers Emery, Bones Don’t Lie: More Famous Dead (Dec. 20, 2012), https://bonesdontlie.wordpress. com. Famous movie star Bela Lugosi was buried wearing the cherished (and likely priceless) cape and other Gothic clothing he wore in the classic Dracula films. Grave Goods: Famous People Who Were Buried with Unusual Keepsakes, Funeral Guide (Feb. 16, 2017), https:// tinyurl.com/4eefyyn3.

More Big Money Items—Collectibles.

It’s widely reported that former President John F. Kennedy, an avid collector of scrimshaw, was buried with a whale tooth engraved with the presidential seal. Id. In an excellent article describing steps beneficiaries may follow when disposing of an inherited collection, two scholars repeat the maxim that “nearly everything is collected by someone.” Thomas Eyssell & Daniel Yezbick, Dad Was a Collector . . . A Guide for Overwhelmed Heirs, 88 CSA J. 55, 57 (2022).

They discuss valuables clients may collect, including stamps, coins, works of art, sports memorabilia, Hollywood memorabilia, political memorabilia, movie and other posters, Civil War and other military items, toys (including trains), wines and spirits, teddy bears,

78 rpm records, couture clothing, comic books, baseball and other trading cards, lunch boxes, vintage guitars and other musical instruments, sheet music, marbles, music boxes, fossils, saints’ relics, indigenous artifacts, inscribed first edition books, Kentucky Derby mint julep glasses, Mickey Mouse watches and other Disney items, bottle caps, 8-track cassettes, fountain pens, action figures (from G. I. Joe to the Teenage Mutant Ninja Turtles), cookie jars, Hummel statuettes, and more. An avid collector might want to take one or more of their treasures into the coffin.

Miscellaneous. All sorts of items may be buried, as demonstrated by tales of celebrities, including George Burns (three cigars); Humphrey Bogart (a whistle); Harry Houdini (letters from his deceased mother); Tony Curtis (a Stetson hat, an iPhone, his Navy medals, and seven packets of Splenda sweetener); Roald Dahl, the author of Charlie and the Chocolate Factory (a power saw, his snooker cues, and a supply of chocolates); and Leonard Bernstein (a treasured book and important sheet music). See Grave Goods: Famous People, supra.

Uncertainty, Secrecy & Grave Robbing. The prevalence of these requests, and the total values involved, seem unknowable with any precision. It is understandable that these arrangements are kept secret except by archeologists who uncover historical items free from the claims of any living heir or beneficiary—public disclosure could lead to grave robbing, family squabbles, and vitriol on social media.

As an example, grave robbers attempted to steal jewelry famously buried with a decedent, but they failed because the decedent’s casket (surrounded by a concrete vault) was nine feet below ground with another empty concrete vault placed on top of it. See Michael Connelly, Robbers Open Grave in Vain Search for Jewelry, L.A. Times, Nov. 14, 1990.

The empty vault on top was intended for use when the decedent’s mother died. After the theft attempt, the family planned to add an extra layer of concrete over the decedent’s burial vault.

Id.

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Law on This Last Request and Grave Robbing The Only Reported Case on This Topic Focused on Encouraging Grave Robbing.

Apparently, only one reported case has decided whether a decedent’s direction to be buried with specific items was enforceable. Strahilovitz, supra, at 800– 01 (stating Meksras is the only reported case). A recent electronic search (on Westlaw) using the word “Meksras” revealed no additional cases.

In her will, Eva Meksras directed that she be buried with her “diamonds and other jewelry, together with certain enumerated pictures.” Meksras Estate, 63 Pa. D. & C.2d at 371. The executor (her accountant) failed to insert the diamonds and jewelry in her coffin before she was buried. After the casket was sealed, the court considered whether she should be exhumed and the items inserted. The court did not order that the decedent’s corpse be exhumed to add the diamonds and jewelry. It concluded the direction in Eva Meksras’s will was unenforceable. The court found that as the will was a public document, enforcing those terms would violate public policy because it would encourage grave robbing. The court did not focus on whether grave robbers actually would succeed; instead, the key was whether the direction would encourage grave robbers. The court emphasized the potential harm to the living from encouraging such behavior—possible “desecration, looting, and destruction of burial grounds.” Id. at 372.

Designing and Drafting to Discourage Grave Robbing More Concrete and Steel. As discussed earlier, in 1977, a court concluded there was nothing illegal about the direction in Sandra Ilene West’s last will that she be buried in her Ferrari. This “famous Ferrari” case likely did not present a serious grave robbing risk because it was made known publicly that after lowering the Ferrari (with Sandra West) into the “9 by 17-foot grave,” the workers covered the Ferrari with concrete.

Timothy Fanning, Bury Me in My Ferrari: How a California Socialite Was Laid

to Rest in San Antonio, San Antonio Express-News (Mar. 22, 2023) (“[C]rews covered [the Ferrari] with cement to discourage potential looting.”).

When expressing burial wishes, in addition to specifying the particular burial plot in the chosen cemetery, the type of casket, and the arrangements for grave maintenance, the testator could provide detailed directions for a burial vault. In the 1800s, inventors developed burial vaults (and other devices, including spring-loaded guns and landmines) to prevent grave robbery when the thieves generally were after “expensive jewelry or other finery” or to steal the cadaver for medical research. See Todd Harra, Resurrectionists and the Advent of the Burial Vault, https://crimereads.com (excerpted from Todd Harra, Last Rites (2022)). Burial vaults can be made of concrete, reinforced concrete, or steel.

Moreover, according to one industry insider, encasing the entire casket in cement might make grave robbing “virtually impossible [as] it would take a long time to get through, even with a pneumatic drill.” Buckland, supra (quoting a “burial expert at Hollywood Forever,” a cemetery, funeral home, and cultural events center).

More recently, many grave robbers tend not to dig at all—instead, they steal the statues, columns, and benches in the cemetery and sell them as garden furniture or decorations at yard sales.

Edith Stanley, Today’s Grave Robbers Do Lively Business, L.A. Times (Nov. 21, 1996), https://tinyurl.com/y4sceeb8.

Perhaps these robbers would be better described as “cemetery thieves.” Indeed, more recently, it’s often said that the primary purpose for grave liners and vaults is to prevent the coffin from settling or sinking into the ground and making cemetery lawn maintenance more difficult, id., rather than preventing grave robbing.

Using the Language of the Will Itself to Discourage Grave Robbing. A drafter could choose to describe the buried property generally rather than include specifics signaling high resale value.

For example, the last will simply might say, “bury me with my engagement ring,” rather than “bury me with my

diamond engagement ring that cost over $250,000 40 years ago.” However, in some states the executor may need to provide a detailed inventory to the probate court, and the inventory document may be a matter of public record. See Stahilovitz, supra, at 801 n.73 (indicating that state laws differ); but see Unif.

Probate Code § 3-706 (providing that the executor must prepare a detailed inventory with the fair market value of the assets, but the executor merely must provide it to interested parties who request it; filing with the court is discretionary). Thus, in some states, merely concealing the value in the last will may not be sufficient. As mentioned above, the will also can direct the use of a burial vault, or that the casket will be encased in cement, or any other practical steps to discourage grave robbing.

Impairing the Value Before Burial. An additional practical step would be to diminish the resale value of the prized possession in the decedent’s waning moments and highlight that fact in the will and the estate inventory. As explained more fully in the second article on this topic (to appear in a future issue), living owners of property generally are free to destroy (or misuse) their property during lifetime, but the right to destroy at death is more restricted under the public policy doctrine. For those who wish to be buried in their favorite car, they could have the catalytic converter, the engine, the hood ornament, and any other valuable parts removed and sold as parts or as scrap metal. Typically, all the fluids would be drained from the car before burial because of environmental concerns.

In the case of collectibles, the methods for decreasing the resale value will depend on the item, and the client (as a collector) likely will know the best methods. For example, one might think that scribbling on a valuable comic book would greatly reduce its value—would someone really pay a substantial amount for a comic book with mustaches drawn on the faces of the superheroes and the villains? Or would someone really pay big bucks for a comic book with the clause “buried with [the decedent’s name], in the

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November/December 2023 47

decade of the 2020s, at the XYZ Cemetery in Any Town, State, USA,” written in ink prominently on the cover? Surprisingly, writing on a comic book does not necessarily greatly decrease its value.

See Matt Nelson, The Official CGC Guide to Grading Comics 243 (2022) (explaining that on the scale for grading comic book condition from 0.0 to 10.0, a “small amount of writing on the cover, such as a name in pen or pencil, may only prevent a comic from achieving a 9.6 or 9.8”).

In contrast, detaching the cover of a comic book from the staples, or cutting off the back cover or an interior page, can drastically reduce the value.

Id. at 152, 158, 183 (providing that the highest grade for a comic book with a detached cover would be 4.0, and a book missing a page often is given a “universal grade of 0.5,” all on a scale from 0.0 to 10.0). As an indication of the difference in resale value of the same comic book at different grades based on the comic book’s physical condition, a copy of Amazing Fantasy #15 (the first appearance of Spider-Man) graded at 9.0 has a price guide value of $404,650; the same comic book at a grade of 2.0 has a price guide value of $13,850. Robert M. Overstreet, 53rd Overstreet Comic Book Price Guide 121 (2023–24 ed.).

Incorporating the Burial Direction in the Will with a Separate Document. The Meksras court rejected the testator’s intent because it was publicly disclosed (in the decedent’s will). One response, discussed below, would be to place the burial instructions outside the will or any other public document. But when it comes to expressing the decedent’s intent at death, wills traditionally have been powerful documents. See In re Estate of Whalen, 827 N.W.2d 184, 195 (Iowa 2013) (Cady, J., dissenting) (“For centuries the last expression of bodily autonomy has been received with solemnity and honored by our laws to the fullest practical extent when declared with the formality of the last will and testament.”). For those seeking the respect given to a will, yet wishing to avoid publicity, an alternative could be including in the last will a reference to another document (such as a letter

addressed to the executor) specifying the client’s desired burial arrangements.

A famous case suggests this approach. S.M. Seeligsohn wished to leave $4,000 at death to Esther Cohn but presumably he did not want the bequest to be public knowledge. Simon v. Grayson, 102 P.2d 1081 (Cal. 1940).

S.M. Seeligsohn’s last will did not mention Esther Cohn, but it referred to a letter in his safety deposit box, and the letter in the box directed the executor to transfer $4,000 to Esther Cohn at the death of S.M. Seeligsohn. Id. The court ordered the executor to pay the $4,000 to Esther Cohn because (i) the will sufficiently described the letter and (ii) the letter was in existence when a codicil to the will was executed. Similarly, a client wishing to be buried with a valuable possession could specify in the will that certain property would be administered by the executor according to a letter in a specified location.

Planning Completely Outside a Will.

Planners praise the trust as a particularly flexible device. See, e.g., Roger W. Andersen & Ira Mark Bloom, Fundamentals of Trusts and Estates 415 (6th ed.

2022). During lifetime, the client could assign the prized possession to the client’s revocable trust and specify in the trust document that the successor trustee must arrange for that specific item of trust property to be placed in the casket immediately before the casket is sealed. Because revocable trusts, in contrast to wills, are not public documents, this could avoid the problem of direct, widespread public disclosure.

Earl D. Tanner Jr., Wills v. Trusts, Utah B.J., Oct. 1997, at 18. Nevertheless, trust documents generally must be made available to direct beneficiaries over the age of 25. Andersen & Bloom, supra, at 723–27. As a result, there would be a risk that one or more beneficiaries might publicize the direction on social media or elsewhere. As a commentator noted, this is precisely the type of story that could draw significant criticism on social media. See Hunting, supra.

Other approaches without a will could include the client making a property transfer of the prized possession to a friend or relative subject to a

condition that upon the client’s death, the friend or relative would insert the item into the client’s casket for final burial. Although this would require the client giving up possession of the item during lifetime, perhaps the client has two identical (or nearly identical) prized possessions, such as two similar teddy bears or two similar comic books.

Instead of structuring this as the transfer of an interest in property subject to a condition, it might be structured as a contract in which the consideration provided by the recipient would be the promise to arrange for the burial of the item with the client. Regardless of the structure, the arrangement could fail if the purpose is deemed contrary to public policy because of the economic waste. Part 2 (in a future issue) will discuss this and related issues.

Conclusion An interesting mix of client beliefs, social practices, and factual circumstances can make the enforceability of a last request depend on whether it will encourage grave robbing. An estate planner may not be able to do much about client beliefs and social practices, such as the view that people should be interred undisturbed, and graves maintained, in perpetuity, rather than the view in other cultures that burial is only necessary while the flesh decomposes, after which the bones can be moved to an ossuary. See Rafaela Ferraz, Cemetery Overcrowding Is Leading Europe to Recycle Burial Plots (July 18, 2018), https://www.talkdeath.com (discussing “raising the dead” and moving the bones to an ossuary after three to five years in Portugal and Greece, the Netherlands (10 to 20 years), Switzerland and Sweden (25 years), Italy (10 to 30 years), Germany (15 to 30 years), and France (10 to 50 years)). Nevertheless, an estate planner may help a client avoid circumstances encouraging grave robbing, particularly (i) suggesting the use of barriers to make grave robbing more difficult and (ii) avoiding any indication in the will or any other public document that the client will be buried with anything valuable. n

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U

nderstanding the inclusion ratio of a trust is crucial for effective estate planning. The inclusion ratio determines the portion of a trust’s assets that will be subject to generation-skipping transfer tax (GSTT) upon a triggering event. Generally, a trust is subject to GSTT when there is a taxable termination under section 2612(a) or a taxable distribution under section 2612(b). A taxable termination occurs when there is a termination of a non–skip person’s interest in the trust resulting in only skip persons remaining as beneficiaries. This may occur at death or due to lapse of time, exercise or release of power, disclaimer, or termination of a trust. A taxable distribution

occurs when there is a distribution of property to a skip person or termination of a trust.

A trust’s inclusion ratio can change over time, as it is affected by the allocation of the transferor’s generation-skipping tax (GST) exemption, the timing of transfers to the trust, and the timing of certain triggering events such as the death of a beneficiary. To fully understand the inclusion ratio of a Carol Warley is RSM’s Washington National Tax private client services tax practice leader. Abbie M.B. Everist and Amber Waldman are members of RSM’s Washington National Tax practice. Tandilyn Cain is a CPA and CFP®.

A Guide to Reconstructing GST Exemption Allocations and Calculating the Inclusion Ratio of a Trust

By Carol Warley, Abbie M.B. Everist, Amber Waldman, and Tandilyn Cain

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November/December 2023 49

trust, you must ask several questions and recreate the history of transfers made to the trust.

1. When was the trust created?

2. When were transfers made to the trust?

3. Is it a GST Trust?

4. Did transfers to the trust qualify for the GSTT annual exclusion?

5. Was any GST exemption allocated to the trust?

6. Were there any general powers of appointment?

7. Has there been a qualified severance?

8. When does the statute of limitations close on the inclusion ratio?

Introduction to Case Study A new client engages you to review their existing estate plan. You start by reviewing the GST status of her 1984 life insurance trust. The history of this trust is as follows: • The trust was created on September 1, 1984, for the benefit of the grantor’s descendants.

• The trust is a GST Trust under section 2632(c)(3)(B).

• The trust was funded with $1,000,000 on October 1, 1984.

The transferors made a gift-splitting election on their 1984 gift tax returns. There were no withdrawal rights granted to any trust beneficiaries.

• The transferors made additional gifts to the trust on October 1, 1999, of $1,000,000 and on October 1, 2002, of $100,000. Gift-splitting elections were made on the 1999 and 2002 gift tax returns. There were no withdrawal rights granted to any trust beneficiaries.

When was the trust created?

The current form of GSTT was enacted in 1986 and generally applies to direct skip transfers and indirect skip transfers made to irrevocable trusts after September 25, 1985. Transfers made to a trust on or before this date are exempt from GSTT and are deemed to have an inclusion ratio of zero. The regulations under section 2601 provide guidance for determining if a trust qualifies, and if so, it will typically be referred to as a “Grandfathered”

trust for GSTT purposes. The regulations further provide that if additions or deemed contributions are made after this date, then a pro rata portion of the trust’s assets will be subject to GSTT, unless an allocation of GST exemption is made.

Appreciation or accumulated income from the Grandfathered portion of a trust will not be considered an addition that affects the trust’s inclusion ratio. Although it may be simple to determine if additions were made to the trust, deemed contributions may not be as straightforward.

The release, exercise, or creation of certain powers of appointment can be treated as a deemed contribution that compromises the trust’s Grandfathered GSTT exempt status. Additionally, if certain modifications are made to a Grandfathered trust, the trust can lose its exempt status. There are modification safe harbors provided in the regulations under section 2601.

Planners should be mindful of these rules when working with Grandfathered trusts to avoid causing unintended exposure to the GSTT. Case Study Because this trust was irrevocable as defined in Treas. Reg. § 26.2601-1 on September 25, 1985, the portion of the trust funded on October 1, 1984, is exempt from the GSTT. The portion of the trust funded in later years will need to be looked at separately, and additional questions will need to be answered before the inclusion ratio can be determined as it relates to those transfers.

When were transfers made to the trust?

As with most areas of the tax law, modern GSTT has changed since its enactment, which makes understanding when transfers were made to a trust important for determining a trust’s inclusion ratio. In addition to the September 25, 1985, date, there are other key dates that planners should be familiar with to understand how transfers made during certain years may be treated differently than under current law. For example, many planners are aware that under current law, there are different requirements for applying the gift tax and GSTT annual exclusions. Until 1988 the requirements for both annual

exclusions mirrored each other. Only transfers made after March 31, 1988, are subject to the more narrow requirements discussed in depth below.

An amendment to the Tax Reform Act of 1986 also created an exception referred to as a “Gallo” trust, which is exempt from GSTT. A Gallo trust is for the benefit of a single grandchild and will have an inclusion ratio of zero if funded with up to $2,000,000 before January 1, 1990, as long as it has not been modified beyond what is permitted in the Grandfathered trust safe harbor regulations under section 2601. This exception is found only in the amendment to the 1986 Act and is not found in the Internal Revenue Code or Treasury regulations.

In 2001, section 2632(c)(1) was added, and certain indirect skip transfers made after December 31, 2000, will have an automatic allocation of GST exemption to the extent the transferor has remaining exemption available. A taxpayer can elect in or out of automatic allocation rules, so having a complete copy of the taxpayer’s gift tax returns is necessary to confirm whether any elections were made.

Case Study (con’t) The dates of the transfers matter because of the different rules in place over the period this trust has been in existence.

• October 1, 1984—Current GSTT was not in place. This trust meets the requirements to be considered irrevocable as of September 25, 1985, and the portion of the trust funded on or before this date will have an inclusion ratio of zero. It will be necessary to confirm no modifications have been made that would compromise its Grandfathered status.

• October 1, 1999—Automatic allocation rules were not in place. You reviewed the gift tax return and determined that there was no manual allocation of the transferors’ GST exemptions to this transfer.

• October 1, 2002—Automatic allocation rules were in place and the transferors’ GST exemptions would have been allocated unless an affirmative election was made to opt out of an automatic allocation by the taxpayer on a timely filed gift

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tax return. You reviewed the gift tax returns and determined no opt-out election was made.

Is it a GST Trust?

A “GST Trust” is defined broadly in section 2632(c)(3)(B) as a trust that could have a generation-skipping transfer. The statute then describes six exceptions to this definition, most of which relate to certain rights or powers held by non–skip persons.

If relying on the application of an automatic allocation, these exceptions should be reviewed carefully because an automatic allocation of available GST exemption will occur only if an indirect skip is made to a GST Trust. These rules apply to transfers made after December 31, 2000.

The exceptions to the definition of a GST Trust can be difficult to navigate, and many planners prefer to make an affirmative election to have the automatic allocation rules apply to a trust or not apply. This election is provided under section 2632 and must be made on a timely filed gift tax return.

An election can be made to treat a trust as a GST Trust even if its terms would not otherwise meet the definition. Similarly, a taxpayer may also make an election out of GST Trust treatment if the trust’s terms meet the definition and an automatic allocation is not desired.

Case Study (con’t) Because this trust does not fall under any of the exceptions in section 2632(c)(3)(B) of the Code, it is a GST Trust and the transferors’ GST exemptions were automatically allocated to any transfers made to the trust after December 31, 2000. The clients’ gift tax returns should still be referenced to determine whether a GST election was made on a timely filed return.

Did transfers to the trust qualify for the GSTT annual exclusion?

The current GST annual exclusion rules apply to transfers made after March 31, 1988. For a short period of time before April 1, 1988, there were fewer restrictions on whether a transfer would qualify for the GSTT annual exclusion. Under current law, in order for a trust to qualify for the GSTT annual exclusion under section 2642(c), it must be a trust that is considered a direct skip trust. If a transfer qualifies for

the GSTT annual exclusion, that portion of the transfer would be exempt from the GSTT. For a gift to a trust to qualify for the GSTT annual exclusion, it must meet the following requirements: 1. The gift must be made to a trust, which is for the benefit of one skip person individual.

2. If the skip person beneficiary were to pass away before the trust terminated, the assets of the trust would be included in that skip person’s estate.

3. The gift must be a present interest gift.

Case Study (con’t) This trust is for the benefit of multiple skip and non–skip persons. Also, there are no withdrawal rights, so transfers to this trust are not present interest gifts.

Therefore, transfers to this trust would not qualify for the GSTT annual exclusion. An example of a transfer that would qualify is as follows: • In 2023, transferor made a gift of $17,000 to a trust for the benefit of their grandchild.

• The trust agreement gives the grandchild a testamentary general power of appointment over the trust assets.

• The trust agreement gives the grandchild the right to withdraw the 2023 contribution to the trust.

Was any GST exemption allocated to the trust?

Under current law, each taxpayer is given a lifetime GST exemption that can be allocated to transfers during life or at death.

Allocation of the taxpayer’s GST exemption shields transfers from the GSTT. Only the transferor can allocate GST exemption to the transfer. Generally, when a gift-splitting election is made on a gift tax return, each spouse is treated as a transferor over one-half of all transfers on the gift tax return for GSTT purposes.

Generally, a transferor will not allocate his GST exemption to a trust that he expects will benefit only non–skip persons, saving it for other planning that is intended to benefit skip persons. There are many ways that a taxpayer can allocate his GST exemption to a trust.

Automatic Allocation Automatic allocation of a transferor’s GST exemption occurs regardless of whether the transfer is reported on a gift tax return. A transferor’s GST exemption is first automatically allocated to any direct skips under section 2632(b). Then, the deemed automatic allocation of GST exemption to indirect skips under section 2632(c)(1) allows the transferor’s GST exemption to be allocated automatically to certain transfers made after December 31, 2000. For indirect skips, an automatic allocation occurs only if the trust is a GST Trust under section 2632(c)(3)(B).

The deemed automatic allocation rules are intended to serve as a safety net. For example, if a transfer to a trust that is a GST Trust and is intended to ultimately benefit skip person beneficiaries was not reported on a gift tax return, it would automatically be protected from the GSTT. However, the well-intended rules also could cause unintended consequences.

For example, if a trust is by definition a GST Trust, but the trust will never benefit a skip person due to non–skip persons depleting the trust, the automatic allocation rules could cause a waste of the transferor’s available GST exemption.

Taxpayers are able to elect to affirmatively opt in or opt out of these rules on a timely filed gift tax return. Ideally, it is best to determine whether or not the transferor wants the automatic allocation rules to apply to a trust when reporting the initial transfer to the trust. Although these rules are a helpful safety net in some scenarios, relying on the automatic allocation rules is not recommended.

There are also automatic allocation rules at death under section 2632(e). The taxpayer’s unused GST exemption is first allocated to direct skips occurring at the individual’s death. Second, the unused GST exemption is allocated pro rata to any trusts of which the decedent is the transferor and from which a taxable distribution or taxable termination might occur at or after the individual’s death. If the taxpayer affirmatively allocates on Schedule R of the estate tax return, the automatic rules for indirect skips will not apply.

Manual Allocation Before January 1, 2001, the transferor’s

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November/December 2023 51

available GST exemption had to be manually allocated to transfers (other than direct skips) on the transferor’s gift tax return. Taxpayers may still manually allocate on a timely-filed gift tax return if there was no automatic allocation because the trust did not meet the definition of a GST trust or an opt-out election was made. The taxpayer’s unused GST exemption can also be manually allocated at death on Schedule R of his estate tax return. When manually allocating a GST exemption, consider using formula language so that the allocation is adjusted upon changes to values.

Late Allocation Late allocation of the transferor’s GST exemption is available when an existing trust is not exempt from the GSTT and the taxpayer wishes to allocate his available GST exemption to that trust based on current values. Under Treas.

Reg. § 26.2642-2(a)(2), an election can be made to treat the allocation as having been made on the first day of the month during which the late allocation is made.

The allocation is not effective until a gift tax return reporting the allocation is actually filed with the IRS prior to the end of that same month. The late allocation is considered effective on the date of filing. This election is not effective with respect to the valuation of a life insurance policy if the insured individual passes away prior to the effective date.

Although a late allocation is typically seen as an available remedy for a missed allocation of GST exemption, it is also a planning opportunity in depressed markets. Assets a taxpayer gifted to a trust in one year might have significantly declined in value before the time that the gift tax return for that year is due. If trust assets have significantly declined in value, opting out of an automatic allocation of GST exemption on the timely filed gift tax return for the year of the gift and subsequently making a late allocation of GST exemption immediately after the deadline for filing the gift tax return may result in the transferor using less of his GST exemption.

Retroactive Allocation Section 2632(d) provides for retroactive

allocations under certain circumstances intended as a remedy for untimely deaths.

The transferor can retroactively allocate GST exemption on a chronological basis to any previous transfer(s) to a trust if the following facts apply: 1. A non–skip person has an interest or a future interest in a trust to which any transfer has been made and 2. Such person a. is a lineal descendant of a grandparent of the transferor or of a grandparent of the transferor’s spouse or former spouse, b. is assigned to a generation below the generation assignmen of the transferor, and c. predeceases the transferor.

The retroactive allocation is reported on a timely gift tax return for the calendar year of the non–skip person’s death. The amount of GST exemption that can be allocated is the amount available immediately before the non–skip person’s death.

The value used for the retroactive allocation is the value of the transfer on the date it was originally made. Even though the original date-of-transfer value is used, the allocation is deemed to have occurred immediately before the death, not as of the original date of transfer.

GST Exemption Allocation Summary The below reference chart was prepared in collaboration with Julie Miraglia Kwon based on her lecture “Generation-Skipping Transfer Tax: Exploring the Nooks and Crannies” given to the American Bar Association Real Property, Trust and Estate Law Section on April 18, 2023. She explained that two important concepts should be considered in allocating GST exemption: (1) valuation of the allocation and (2) effective date of the allocation.

Case Study (con’t) The 1984 transfer was exempt from the GSTT and has an inclusion ratio of 0.000.

No GST exemption was allocated to the 1999 transfer to this trust, so that portion of the trust is fully subject to the GSTT. Because it is a GST Trust, however,

automatic allocation of the transferors’ GST exemptions occurred for the 2002 transfer to the trust. Because the trust has a mixed inclusion ratio, the taxpayer could consider a late allocation of GST exemption if he is concerned about paying GSTT as a result of transfers to skip persons.

Were there any general powers of appointment?

A general power of appointment over a trust’s assets can change the identity of the transferor, which presents both planning opportunities and pitfalls. An individual must be the transferor to allocate available GST exemption. A right of withdrawal over a portion of a trust’s assets is also considered a general power of appointment, and seemingly simple Crummey withdrawal rights can lead to GSTT issues.

The regulations under section 2652 provide that the lapse of a withdrawal right in excess of $5,000 or 5 percent of trust assets will cause the power holder to be deemed to have transferred the excess amount to the trust for GSTT purposes.

To avoid this consequence, withdrawal rights are commonly drafted to avoid the lapse of the power to the extent it is greater than $5,000 or 5 percent of trust assets. This creates what is commonly referred to as a hanging Crummey power, and this portion of the withdrawal right remains in existence. A hanging Crummey power can cause estate tax inclusion.

Case Study (con’t) The trust agreement will need to be reviewed to confirm that no general powers of appointment exist that could cause a change to the transferors for GSTT purposes. There are no withdrawal rights available to the trust’s beneficiaries, so there is no need to determine whether hanging withdrawal rights will cause estate inclusion and changes to the transferors.

Has there been a qualified severance?

Some trust agreements include language that will trigger a severance automatically if an inclusion ratio is other than 0.000 or 1.000. If the trust does not contain that type of language, however, a qualified severance may be necessary. When a trust

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has an inclusion ratio other than 0.000 or 1.000, the trustee may be interested in doing a qualified severance under section 2642(a)(3)(B) and Treas. Reg. § 26.26426(e). A qualified severance divides the trust into two or more trusts so that the resulting trusts either have an inclusion ratio of 0.000 and are exempt from GSTT or have an inclusion ratio of 1.000 and are nonexempt from GSTT. Administering a trust with an inclusion ratio other than 0.000 or 1.000 can be complicated, time consuming, and expensive for the trustee.

When the trust is severed into trusts that are either GST exempt or GST nonexempt, it can be much simpler to administer.

Case Study (con’t) Because this trust has a mixed inclusion ratio, it is a good candidate for a qualified severance. As shown at the bottom of the next page, the inclusion ratio of the trust is 0.346. This means that 34.6 percent of the trust is subject to the GSTT. The trustee can sever 34.6 percent of the trust into a GST nonexempt trust with an inclusion ratio of 1.000 and 65.4 percent of the trust into a GST exempt trust with an inclusion ratio of 0.000. The trustee could intentionally make distributions from the nonexempt trust to the non–skip beneficiaries and deplete it before it goes on to skip persons. The trustee could use

TYPE OF ALLOCATION

the exempt trust for the benefit of skip person beneficiaries. This would ensure the transferors’ GST exemptions were used efficiently. If the transferors have additional GST exemption in the future because of inflationary increases, they could choose to make a late allocation to the nonexempt trust portion to protect those assets from the GSTT. When does the statute of limitations close on the inclusion ratio?

Although it is common to report the allocation of GST exemption on a gift tax return, adequate disclosure of the transfer on a gift tax return does not start the statute of limitations with respect to the inclusion ratio of a trust (unless all transfers to the trust were direct skips, which have a different rule). Under Treas. Reg. § 26.2642-5, the inclusion ratio of an indirect skip trust is generally not final until the later of • The expiration of the period for assessment with respect to the first GST tax return filed using that inclusion ratio or • The expiration of the period for assessment of federal estate tax with respect to the estate of the transferor, even if an estate tax return is not required to be filed.

This means the inclusion ratio of a trust is not final until the transferor passes away and a GST tax return is filed. For trusts with somewhat uncertain inclusion ratios other than zero, the trustee may want to consider making a taxable distribution and have the recipient pay a small amount of GSTT after the transferor passes away. This would report the inclusion ratio on a GST tax return and start the statute of limitations to achieve finality with respect to that inclusion ratio.

Case Study Conclusion Let’s calculate the inclusion ratio of the trust in our case study. This calculation is simplified, as we have two transferors for GSTT purposes due to the gift-splitting elections made on the gift tax returns.

For purposes of this illustration, we have combined the two shares even though, for GSTT purposes, two trusts exist. We have used an illustrative growth rate of about 4 percent.

First, we have the October 1, 1984, transfer of $1,000,000. Because this transfer was made before the enactment of the current GSTT, it is Grandfathered pursuant to Treas. Reg. § 26.2601-1(b).

The inclusion ratio for this first transfer is 0.000. This Grandfathered portion is treated as if the transferor had allocated the GST exemption to the transfer for

VALUATION

EFFECTIVE DATE

Automatic allocation

Date-of-transfer value

Date of transfer

Timely manual allocation

Date-of-transfer value

Date of transfer

Retroactive allocation

Date-of-transfer value

Immediately before the untimely death

Late allocation

Election to use the value for first day of the month of filing; otherwise value on date of filing

Date of filing

Rev. Proc. 2004-46 (before 2001, under annual exclusion, present interest)

Date-of-transfer value

Date of transfer

9100 relief

Date-of-transfer value

Date of transfer

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November/December 2023 53

purposes of the inclusion ratio calculation.

Next, we have the October 1, 1999, transfer of $1,000,000. The taxpayer and spouse did not affirmatively allocate any of their GST exemption on the 1999 gift tax return, so no GST exemption was allocated to this transfer. Assuming that the pre-transfer value of the trust’s assets is $1,800,000, the inclusion ratio is calculated as follows: Applicable fraction: ($1,800,000 [current value of Grandfathered portion]/$2,800,000 [trust value after transfer]) = 0.643; Inclusion ratio: 1 – 0.643 = 0.357.

Lastly, we have the October 1, 2002, transfer of $100,000. Although the taxpayer and spouse did not affirmatively allocate any of their GST exemption on the 2002 gift tax return, the deemed allocation rules under section 2632(c)(1) applied because this is a GST Trust within the meaning of section 2632(c)(3)(B) and no opt-out election was made. Therefore, $50,000 of the taxpayer’s GST exemption and $50,000 of the spouse’s GST

allocated to this transfer]/$3,300,000 [trust value after transfer]) = 0.654; Inclusion ratio: 1 – 0.654 = 0.346.

Thus, 34.6 percent of the trust is subject to the GSTT. If you recommend a qualified severance to your client, the trust could be divided into a GST exempt portion with an inclusion ratio of 0.000 and a GST nonexempt portion with an inclusion ratio of 1.000 for ease of administration and distribution planning purposes.

exemption was automatically applied to the transfer. If the pre-transfer value of the trust assets is $3,200,000, the inclusion ratio is calculated as follows: Applicable fraction: ($2,157,600 [current value of Grandfathered portion of $2,057,600 + $100,000 of GST exemption

Conclusion There are remedies available beyond the scope of this article to mitigate unexpected GSTT concerns. These include section 9100 relief and timely allocation relief under Revenue Procedure 2004-46.

As you can see, reconstructing a trust’s inclusion ratio can be complicated, and there are many factors to consider. Going through this process can open the door to many planning opportunities and chances to provide significant value for your client. n

DATE OF TRANSFER:

10/1/1984

10/1/1999

10/1/2002

Value of transfers on this date attributable to transferor

1,000,000

1,000,000

100,000

Pre-transfer value of trust’s assets attributable to transferor

0

1,800,000

3,200,000

Multiply by pre-transfer redetermined applicable fraction

0.000

1.000

0.643

Pre-transfer nontax portion of the trust

0

1,800,000

2,057,600

Allocation of GST exemption to the trust

N/A

0

100,000

Grandfathered portion of transfer not subject to GSTT

1,000,000

N/A

N/A

Pre-transfer nontax portion of the trust

0

1,800,000

2,057,600

Numerator of post-transfer redetermined applicable fraction

1,000,000

1,800,000

2,157,600

Value of the trust principal immediately after the transfer

1,000,000

2,800,000

3,300,000

Denominator of post-transfer redetermined applicable fraction

1,000,000

2,800,000

3,300,000

Redetermined applicable fraction after this transfer

1.000

0.643

0.654

Inclusion ratio (1 – redetermined applicable fraction)

0.000

0.357

0.346

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TECHNOLOGY PROPERTY Getting Your Firm Ready to Move to the Cloud: Lessons Learned from Migrations Over the past five years, I have helped hundreds of law firms and thousands of lawyers successfully move to the Cloud.

They have been able to retire much of their expensive physical infrastructure (file servers, DMS servers, database servers, email servers, and tape backups) and lower their maintenance costs. They have moved their documents and data to services hosted in the Cloud, accessible on any device over the internet. In so doing, they have gained access to enterpriselevel service and enterprise-level security.

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SAAS vendors focus on the benefits of their offerings and the ongoing costsavings, which are real. They often gloss over or underestimate the costs to your firm of migrating to their SAAS platform.

In this article, I will share some lessons learned from helping law firms migrate to the Cloud. Some of these suggestions will lower the cost of the migration, and others will increase user satisfaction after the migration.

What Should You Migrate to the Cloud?

My most successful migrations involved firms who knew what they wanted to migrate to the Cloud, where they wanted to put it, and what they wanted to leave in place. Often, the hardest decision in moving to the Cloud is deciding what not to move to the Cloud.

Technology—Property Editor: Seth Rowland (www.linkedin.com/in/ sethrowland) has been building document workflow automation solutions since 1996 and is an associate member of 3545 Consulting® (3545consulting.com).

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

You can migrate everything to the Cloud. Hosted network offerings allow you to simply upload your entire infrastructure to a data center—lock, stock, and barrel. Users will then use a remote access client like Citrix, Amazon Workspaces, or Azure Virtual Desktop to connect to their desktops. These solutions allow you to work in a cloud desktop window and do everything you can in your current localhosted network.

Such solutions tend to be expensive and limited to the client-server software you use. You also pay for cloud storage of everything, even the things you never use. Furthermore, most virtual network solutions limit the devices you can use to access your data to your desktop or laptop computer. Though you may be able to view your desktop from an iPad, cellphone, or tablet, you would never want to work on your virtual desktop from such a device. Moreover, these solutions allow you to continue to use legacy software, which often has limited support or an end-of-life expiration date, rather than migrating to legal SAAS software.

Migrating Your Work Product Documents. Some firms have started their journey to the Cloud by moving their documents to the Cloud. Although adopting DropBox and Box.com as a solution is tempting, there are access, security, and management reasons to look for more robust document management solutions (DMS).

If you plan to move to a DMS solution or already have an on-premises DMS solution, your firm should decide what documents should be moved. I recommend limiting the documents to attorney work product and client communications. Cloud DMS systems cost more for document storage than simple storage; the management part, which includes indexing, search, robust and granular security, and user management policies not available in mere cloud storage, adds expense to the service. Because of these costs, bringing over documents from cases closed a decade ago may not make economic sense. Your firm needs to decide in advance whether to limit the documents to be migrated and, if so, what to do with documents that are not to be migrated.

Migrating Your Special Use Programs, Discovery, and Document Production. Not all documents are equal. A two-hour video is a document, but you may not need the DMS overhead to search the video because it is not a work product that will be edited. Similarly, a 100 MB .pst file (of Outlook emails) could be stored in a DMS, but it is more useful when reviewed from a Litigation Support System (LSS). There are cloud-based LSS systems like Lexbe, NextPoint, and Disco, where you can upload email files and run effective searches for document review and production. Putting those files in a cloud DMS or an unsecured file-share program is not the best way to use these files. Moreover, there are depositions, medical records, police videotapes, etc., that can take up terabytes of space on your network file server that should not be moved into a cloud-based DMS. In preparing for a migration, know what you are storing on your network and decide where you want it to go.

Migrating Your Billing System. There are many reasons to migrate your billing system. The main reason is mobility. Lawyers and staff no longer work from a single location; they are on the move. They also work on various devices, including desktops,

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TECHNOLOGY PROPERTY

laptops, home computers, and cell phones.

If you want to capture all that time, you will want a cloud-based billing system or a web-based time entry interface. Also, if your firm has users working from multiple locations (i.e., a satellite office or offices in multiple cities), having a central location for billing data is a prime benefit of cloud-based billing systems.

Like the document migration decision, not all billing data is equal or relevant.

Converting all historical data into a new billing system can be expensive. More often, a migration involves open invoices, work-in-progress slips, and active matters.

If you don’t ask, that is often all that you get. If you want to bring over all matters (including historical and closed matters), you must ask and specify what you need to migrate to a new billing system. You will also want a summary showing the historical invoices’ value. This may not be in your general ledger but might be brought over as a document or note slip so you can review what happened before conversion.

Like the documents, you must plan what you do with the data you left behind. You will need access to this data for at least a year or more.

Migrating Your Practice Management System. Many firms have large amounts of data in practice management systems that track their matters, client communications, and work notes. You will generally want to move all of this data, as it contains extensive relationship data and will be needed for conflict checks.

Prepare for the Migration When the United States government decided to send men to the moon, NASA decided what to carry in the rockets with them. Space was at a premium; every ounce counted. NASA organized the items the astronauts would need for accessibility and use. Even today, with the modern SpaceX Falcon 9 rocket, it still costs $1520/kilogram to hoist a satellite into Earth orbit.

The Cloud is not nearly as constrained as an Apollo or FalconX rocket, but the Cloud is also not an unlimited expanse.

Your best results will happen if you define what you need in the Cloud and how you want it organized. This process will often involve extensive work by members of

your firm (attorneys and staff) getting everything organized.

Organize Your Documents. If you ever looked inside an attorney’s “My Documents” folder, you would realize that this folder and its contents should never be uploaded to the Cloud. And yet, many users have gigabytes of disorganized data in their My Documents folder. As a firm, you need to decide how documents will be organized. Start with restructuring your files on your network file share. Most firms organize files into folders by client, with subfolders by matter. If you are moving from a file share to a DMS, look carefully at how your documents are organized and be prepared to adjust. If you only want to move active matters into the Cloud, create a folder for inactive matters and move the documents into that folder and out of the active matters folder.

Benefits of Folder Tagging. Our best success in getting documents from a file system and into a matter-based DMS has happened when firms clearly tagged the folders to indicate which client and matter the contained documents should be filed to. The tag should identify which client number and matter number is associated with that folder and must be consistent across the entire file system. If you further want to assign document types, you will also need to tag your folders to the appropriate classification. If there are documents you want excluded from the migration, tag them with DNM (Do Not Migrate).

Make Your Documents Accessible to the Migrator. Often, document security on a network is controlled by access policies based on a user’s login. If you want a migrator to move confidential documents, you must ensure that the migrator’s login can see the documents to be moved. It is impossible to move hidden documents or inaccessible documents to the Cloud.

An inventory of all the unique nooks and crannies is in order.

Clean Up Your Data. If you are migrating billing or practice management data into the Cloud, now is the time to evaluate and clean up the data. This is particularly so if you plan to bring documents in and associate them with clients and matters in these systems. You must understand your client and matter lists and ensure

they are clean. That means: (1) all matters must have a clearly defined single client; (2) there must be a unique matter number for each matter; (3) the client number and the matter number schema of your Cloud billing system must match the number schema of your cloud DMS system; and (4) client descriptions and matter descriptions must be brief and contain only text characters (no tabs, long dashes, slashes, or foreign non-ASCII characters).

If you bring in data from a contact management system, such as contact lists, you will save hundreds of hours and thousands of dollars by de-duplicating your contact lists. Clean up the lists; make sure email addresses are consistent.

Merge duplicate contacts and confirm the addresses. Before you migrate, it is time to do this cleanup. Get rid of bad contact data, or at least put a DNM flag on the contact entry or exclude it from the migration.

Working with Migrators and Your IT Staff Migration to the Cloud requires a lot of work and a lot of cooperation between you, your staff, your IT group, and your migrators. Some cloud vendors include migrations as part of the cost, but most charge extra or outsource the migration to certified consultants. Even when cloud vendors offer to include migration, they assume a level of data preparation for that migration. The best results are achieved when you work with a consultant to help you align your data for the migration.

Engaging Your IT Staff. You are in good shape if your IT staff recommends moving to the Cloud and leads the process. If your firm is taking the lead, be sure to inform and coordinate with your IT staff so that they know what is required of them to facilitate the process. They may reasonably feel threatened by the process of migration. Bring them into the meetings; let them attend training. They are a vital part of the team.

Firstly, they hold the keys. To do a migration, we will often connect a device to your firm’s network and establish remote access to that device. We will need login credentials and rights to do the work.

Secondly, the IT Staff is the team that attorneys and staff will call first when they

Published in Probate & Property, Volume 37, No 6 © 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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have a problem. The more they understand the new Cloud software, the better the user experience.

Thirdly, many cloud programs require a desktop client to be installed and configured.

This client will need some configuration rules to be pushed out and will have periodic updates. Moreover, the current DMS system may need to be decommissioned, and your IT staff will know how to do it. As consultants, we can advise them on best practices, but we do not have all the keys.

Engaging Your Migrator. Not all migrators are alike. If your cloud vendor includes the migration, get references for current law firms to discuss the migration experience.

Ask the vendor if any consultants helped prepare for the migration. If you are to work with a certified consultant for the migration, also get references. There is a lot of work that goes into migration; experience counts.

Get a clear sense of their migration process; don’t assume anything. There are purported universal migration tools. These tools make assumptions about how your data is organized (which may not be accurate) and what data is to be migrated (which may not be what you expect or want). Several practice management systems have custom fields; the universal tools and vendor-based migrations often exclude this custom data.

Access Requirements for the Migration to the Cloud. When it comes to migration, migrators need access to the files to be migrated and access to your firm’s current billing system and practice management system. Your migrator will need local administrator rights to the hardware, login credentials for each billing program, and the back end SQL server credentials. If there is already a cloud-based billing program, your migrator will need administrator login credentials to that program so that we can set up integration between that and your new Cloud DMS. Change Management and Managing Expectations Moving to the Cloud is a dramatic change. It can be quite disruptive for your staff. It can bring on great anxiety, which detracts from the benefits of the change. Be prepared for some opposition. Realize that some of the responses are emotional, not fact-based, and, in time, your staff will become used to the new way of doing things.

Engage Your Staff in the Design Process. Get your staff involved in the implementation process. Solicit their feedback and adjust the design. When moving to a new platform, things will work differently. You should have the same or better functionality, but the workflow will differ. You are not paying a lot of money to do the same thing, but in the Cloud; you are hoping to improve productivity, which means doing some things differently. Your staff knows how things are currently being done and should meet with the consultants to share that information. Don’t assume the consultant knows everything. Solicit from your staff what they would like to do better. They can then take pride of ownership of these changes.

Get the Timing Right. Try to have a trial period where users can try out the software before it is put into production. Have them use the software and iron out the kinks. When you schedule the “Go Live,” don’t spring the change by fiat on attorneys and paralegals about to go to trial or on administrators trying to complete end-of-quarter bills. Understand the timing of when to do the actual migration.

Leaving Stuff Behind. If you are leaving stuff behind, get a consensus on what will be left behind. The decisions need to be made before the migration starts.

Changing your mind after the migration will incur additional costs, such as a change order. Be clear about what you want with documents and with data. If you are not bringing in everything, let your team know how to access this old data. Will it be on a read-only file share?

Will you retain a single-user license to your old billing system and host it on a virtual machine? These decisions must be made.

Dealing with Old Emails. Bringing over completed tasks or past calendar events in a practice management system doesn’t make sense. If you bring over open tasks, limit them to tasks for open matters and exclude the personal and repeating tasks.

If your practice management system stores emails in data tables, realize there will be a conversion cost to convert those emails into usable emails, so you may decide not to bring them in.

Some Training Tips and Suggestions You will want end-user training. Training videos are helpful, but live trainers will engage your staff and allay their fears.

Spend time defining with your migrator what you expect out of training. Consider having a training session with a pilot group. You will then want to adjust how the rest of your users will be trained. Realize that with all software, there are many paths to the same result. You will want to find the paths that work best with your team.

We have found a combination of live training and a self-guided learning management system brings the greatest satisfaction and acceptance. We record the live training for anyone who misses it to review. We then direct the users to the LMS system for further self-guided exploration. In the live training, encourage questions. Five or more users had the same question for every question asked but weren’t willing to ask. Have your staff be respectful and attentive (training is not the time to check your email), but don’t be shy.

Before the Training. If introductory videos are available, encourage your staff to review them before training, lest they force the trainer to spend valuable time defining terms. When doing web-based training, work with your IT staff in the preceding days to make sure all the software and plugins work and that each user can log in to the Cloud system and work.

Training class is not time to troubleshoot computer workstations; other attendees are frustrated when their time is wasted on getting others’ workstations to function properly. Make sure your IT has the workstation working correctly before the training starts.

Taking the Plunge Each migration is unique. Moving to the Cloud is important. It is not just a hardware decision. There are significant benefits for your firm. At the same time, it is a major process change. Take the time to think about the process and what you want to accomplish for your firm. You can achieve it with a well-thought-out outcome, proper planning, and proper resources. n

Published in Probate & Property, Volume 37, No 6 © 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.

November/December 2023 57

LAND USE U P D AT E Off-Premises Billboards and On-Premises Signs One of your clients has a problem. The city rejected his application to put up a billboard because the sign ordinance prohibits off-premises signs like billboards but permits on-premises signs.

He believes this distinction is unconstitutional. What would you advise?

The Off-Premises vs. On-Premises Problem Thousands of sign ordinances have prohibited off-premises and allowed onpremises signs since the early days of sign regulation. How this difference in treatment originated is unclear, but it may have been due to differences between these sign types in the early years of sign regulation. Off-premises billboards originally were free-standing wooden structures, while on-premises signs were attached to walls. These differences have disappeared. Today, for example, tall pole signs often serve as on-premises signs, raising the same aesthetic problems as offpremises billboards that are placed on tall poles.

The 1965 federal Highway Beautification Act (HBA), 23 U.S.C. § 131, also allows different treatment. It requires states to prohibit billboards within 660 feet of federal interstate or primary highways but exempts on-premises signs. States may exempt “signs, displays, and devices advertising the sale or lease of property upon which they are located” and “signs, displays, and devices . . . advertising activities conducted on the property on which they are located.” About two-thirds of the states have similar exemptions. The HBA preempts local sign ordinances, except in states where they can be different from the federal law.

Different rules for off-premises and Land Use Update Editor: Daniel R. Mandelker, Stamper Professor of Law Emeritus, Washington University School of Law, St. Louis, Missouri.

on-premises signs are questionable because they undercut the aesthetic purposes of sign regulation. A sign ordinance can prohibit billboards but must allow on-premises signs that may also be aesthetically offensive unless they are regulated, which the off- vs. on-premises distinction does not require. The different treatment of off-premises and on-premises signs has survived, but its place in modern sign ordinances is doubtful.

The Constitutional Issue Distinguishing off-premises and on-premises signs presents an equal protection problem unless there is a satisfactory explanation for the distinction. There may not be one, because on-premises and offpremises signs can both present aesthetic problems.

Court decisions were favorable despite this problem. All but one state court held the off-premises vs. on-premises distinction constitutional. One court held that the business purpose of on-premises signs justified different treatment because it distinguished them from off-premises signs. Another court held that a city could reasonably classify on-premises and offpremises signs differently to minimize sight pollution. This holding sounds like the relaxed equal protection that courts apply to social and economic laws.

State and federal courts that considered on-premises sign exemptions in the federal Highway Beautification Act were also favorable. They accepted the different treatment of off-premises and on-premises signs in highway beautification statutes, accepted exemptions allowed under state laws, and accepted state laws allowing commercial and noncommercial on-premises signs. They held that the avoidance of economic hardship and the unique nature of business signs were reasons for allowing on-premises signs. They rejected free speech objections, an issue that became more troublesome later.

Review Under the Free Speech Clause The legal problems faced by the different treatment of off-premises and on-premises signs deepened after the Supreme Court decided that the free speech clause protects commercial speech. Sign ordinances regulate commercial speech. In Central Hudson Gas & Electric Corporation v. Public Service Commission, 447 U.S. 557 (1980), the Court adopted a four-factor test for the regulation of commercial speech.

If the speech concerns lawful activity and is not misleading, then the asserted governmental interest must be substantial, the regulation must directly advance the governmental interest asserted, and it must not be more extensive than necessary to serve that interest.

Courts hold that the Central Hudson factors provide an intermediate standard of judicial review, which is more demanding than the rational basis standard of judicial review that courts apply to economic laws, like sign ordinances. Nevertheless, in Metromedia, Inc. v. San Diego, 453 U.S. 490 (1981), a plurality of the US Supreme Court easily upheld a ban on billboards and rejected problems presented by the Central Hudson factors. This decision, now treated as a majority opinion, is the leading Supreme Court case on the intermediate judicial review of billboard regulation under the free speech clause.

The Metromedia Court also upheld the different treatment of off-premises and onpremises signs that were included in the San Diego ordinance. It accepted traffic safety as a legitimate governmental interest for prohibiting billboards, but the sign company claimed that “the city denigrates its interest in traffic safety and defeats its own case by permitting onsite advertising and other specified signs.”

An occupant of property, the company argued, can use billboards to advertise goods and services offered at his location, while identical billboards, “equally distracting and unattractive,” are prohibited if they advertise goods or services available elsewhere.

The Court rejected these arguments, after noting that all courts had explicitly or implicitly rejected them. It held that prohibiting

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offsite advertising was directly related to traffic safety and aesthetic objectives and that this relationship was not changed even though “the ordinance is underinclusive because it permits onsite advertising.” The city may believe that offsite advertising is a more acute problem because of its periodically changing content. The Court then held that the city could decide that commercial interests in advertising could outweigh the city’s interests. It does not follow because “the city has concluded that some commercial interests outweigh its municipal interests in this context that it must give similar weight to all other commercial advertising.” Applying but not mentioning one of the Central Hudson factors, the Court concluded that the off-premises vs. on-premises distinction did not fail “directly to advance substantial government interests.”

Metromedia applied a balancing test that weighed commercial interests in on-premises advertising against the city’s traffic and aesthetic interests, while at the same time recognizing the more serious aesthetic problems of off-premises advertising. The Central Hudson factors do not authorize this kind of balancing, although it is consistent with the Court’s deferential treatment of the billboard prohibition in the sign ordinance.

The Content Neutrality Requirement Metromedia did not end the legal problems for the off- vs. on-premises distinction because laws that regulate free speech must not be content-based. Content-based laws receive strict judicial scrutiny and are presumed unconstitutional. This is a high barrier, as strict scrutiny often is strict in theory but fatal in fact.

Sign ordinances that include the offpremises vs. on-premises distinction create a content-based problem because they define both types of signs by their content.

They define an off-premises sign as a sign not advertising goods and services sold on the premises, and they define an on-premises sign as a sign advertising goods and services sold on the premises. These definitions escaped judicial attention for years until some federal courts held that the HBA definition of off-premises signs was contentbased, under-inclusive, and not narrowly tailored.

City of Austin v. Reagan National Advertising of Austin, LLC, 142 S. Ct. 1464 (2022), ended the content-based threat. The sign

company attacked Austin’s sign ordinance as content-based because it allowed the digital conversion of on-premises signs, but not the digital conversion of off-premises signs, and defined off-premises signs with the typical content-based definition.

Justice Sotomayor’s opinion rejected the content-based trap. She held that message content in the definition of an offpremises sign mattered only to the extent that it provided information about “the sign’s relative location” and that locationbased regulation does not require strict scrutiny. She also upheld the off-premises sign definition by relying on the extensive historical use of this definition in sign ordinances and the HBA. I discuss the City of Austin case in my Land Use Update, The Supreme Court Speaks on Billboards, Prob. & Prop., Sep/Oct 2022, at 58.

Court Decisions Applying City of Austin The Supreme Court’s decision in City of Austin ended the content-based threat but not the case. Justice Sotomayor remanded the case back to the Fifth Circuit to decide whether there was evidence of impermissible purpose or justification and whether the sign ordinance failed intermediate scrutiny because it was not narrowly tailored to serve a significant governmental interest.

This instruction is surprising because narrow tailoring is not one of the Central Hudson factors the Court applied in Metromedia to uphold the off-premises vs. on-premises sign distinction. Instead, narrow tailoring is one of several factors courts apply when reviewing time, place, and manner (TPM) regulations, which can include sign ordinances, although the Supreme Court has not indicated when TPM factors apply and when Central Hudson factors apply. The Seventh Circuit attempted to clarify this problem by holding that narrow tailoring “aligns” with the intermediate judicial review applied in Metromedia. Adams Outdoor Advertising Ltd. Partnership v. City of Madison, 56 F.4th 1111 (7th Cir. 2023). This conclusion is debatable because there are significant differences between the TPM and Central Hudson factors.

On remand, the Fifth Circuit in Reagan National Advertising of Austin, Inc. v.

City of Austin, 64 F.4th 287 (5th Cir. 2023),

explained that the plaintiffs did not assert an impermissible purpose or justification but that the court had to decide whether the ban on digitizing existing off-premises signs was “narrowly tailored to serve a significant government interest.” The court discussed Metromedia’s decision upholding the off-premises vs. on-premises distinction and held that the Austin sign code was supported by the “same logic.” The problem is that Metromedia did not apply the narrow tailoring rule the remand was supposed to consider.

The sign company also argued that the court should not allow an exemption for onpremises digital signs because the Austin sign ordinance did not include any limits on their display. The court held that this argument was factually incorrect, perhaps implying that a sign ordinance can exempt on-premises signs only if it limits their display.

In Adams Outdoor, the ordinance banned billboards but allowed digital signs in a few locations subject to strict limits. Following the US Supreme Court in City of Austin, the Adams Outdoor court held that the off- vs. on-premises sign distinction was contentneutral, and that Adams Outdoor had not “meaningfully argued” that the digital sign ban “flunks” intermediate scrutiny. Prohibiting digital signs serves significant governmental interests in promoting traffic safety and preserving visual aesthetics.

Conclusion It is not clear whether the survival of the off-premises vs. on-premises distinction means that courts will provide only a limited judicial review of sign ordinances, or only that they will not interfere with a historic regulatory distinction. This distinction is anachronistic, unnecessary, and should be eliminated. Constitutional problems can be avoided, and sign ordinances made more effective, if based on the type of sign that is regulated, not its message. An ordinance can specify size, height, area, and other regulations to decide what type of sign is permitted at each location where signs can be displayed. Definition by message is not necessary.

Update on Manufactured Housing I have published a working paper, Getting Zoning for Manufactured Housing Right (2023), https://tinyurl.com/2vy88wpx. n

Published in Probate & Property, Volume 37, No 6 © 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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CAREER DEVELOPMENT AND WELLNESS Actualization for Well-Being— A Framework for Achieving a Higher Level of Actualization Seeking the Actualized Side of Self To understand the concept of actualization, it is helpful to consider Maslow’s Hierarchy of Needs. Maslow’s Hierarchy of Needs is a model that establishes levels of needs that a person focuses on and must meet before moving to the next need in the hierarchy. The hierarchy of needs can be considered both on individual and business levels.

The most basic level in the hierarchy of needs is physiological needs. At this level are basic survival needs, including employment and income sufficient for basic needs. The second level of needs is security. Security can be about physical safety, emotional safety, fair work practices, and benefits. Although it might be easy to ignore these two basic levels in the workplace, there may be employees whose needs at these levels need to be met.

The third level of needs is social needs.

For social needs to result in actualization, it is vital to surround oneself, whether at work or outside of work, with those who accept us for who we are to achieve a sense of safety. This acceptance isn’t always possible at work. The fourth level is esteem needs. At this level, the focus is on self-respect, achievement, recognition, and appreciation.

At the top of the hierarchy is self-actualization. A self-actualized person has achieved such status through internal growth and development. Self-actualization is becoming or actualizing one’s highest self and potential. Self-actualized people connect deeply to a sense of purpose beyond the normal day-to-day. They are grateful, humble, and fulfilled. A selfactualized person is more resilient and operates from abundance and strength

rather than scarcity and sphere.

An actualized person will function as a good friend, co-worker, leader, or boss.

Things go wrong when a person functions from that person’s shadow side. When the shadow side prevails, a worker may be unproductive, and relationships may be negatively affected.

Seek and Train for Intense SelfActualization A person who is self-actualizing is living to her highest potential. The self-actualized person commits to confronting and managing the shadow side of the self. Selfactualized persons train themselves to be objective and address challenges proactively with a problem-solving mindset.

Tips for Training Greater Self Actualization Your daily self-actualization workout could incorporate any or all of these five tips to establish and reinforce the self-actualized muscle memory.

1. Know your shadow’s triggers.

Identify the situations—including people—that seem to trigger you and develop a plan to avoid being triggered.

2. Be objective and accepting, not defensive, about your struggles. We all struggle with something. Accepting the existence of the struggle allows you to focus your energy on devising a strategy for success.

3. Boost your solution-focused mindset. When things go wrong, the temptation to blame colleagues, yourself, or circumstances can sometimes be irresistible. Try looking at things as a challenge or a process problem rather than seeking to blame a particular issue on another Contributing Author: Mary E. Vandenack, person.

Vandenack Weaver LLC, 17007 Marcy Street, 4. Prioritize self-care. Never com#3, Omaha, NE 68118. promise self-care. Block it in your

calendar with the highest priority, and never reschedule.

5. Schedule strategically for resilience. Self-awareness, mindfulness, self-care, positive relationships, and intentionality build resilience.

If you need time to yourself in the morning to read, do yoga, or run, take it. The point is to identify what is and isn’t working for you and fix the latter. The same goes for people.

How to Get Out of Your Shadow, Now Even though you have built your selfactualization muscle and stamina, there will be the proverbial “bad day.”

Practice strategies to develop your selfactualization muscle but also as your emergency self-actualization.

1. Create a time-out. If you are in a tense situation, find a way to take a break. It may be as simple as saying, “I’d like some time to reflect so I can give you my best thinking.”

2. Breathe deeply. As you breathe, shift your focus entirely to the breath, the present moment. Think about how your body feels as the tension dissipates and the fight or flight instinct dissolves.

3. Choose cordial over shadow. Grace matters the most in challenging moments. Learn to practice cordiality when you don’t want to, even when you know you are right or the other person is triggering you.

4. Focus on what you can do.

Eliminate distractions, practice mindfulness, and take a break.

Train your brain regularly.

5. Reduce reactivity with curiosity.

Step back and assess your belief about the person or situation.

Assume you are missing facts and that others have the best of intentions. n

Published in Probate & Property, Volume 37, No 6 © 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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2023 PROBATE & PROPERTY INDEX AUTHOR INDEX Drennan, William A., The Law of a Last Request, Part 1: Bury Me with My Favorite Toy, Nov/Dec at 44.

Gary, Susan N., Patagonia, Purpose Trusts, and Stewardship Trusts—Business with a Purpose, Jan/Feb at 36.

Duffy, Michael, Designing Long-Term Trusts to Hold Art and Collectibles, Jul/ Aug at 20.

Groff, Beck, Patagonia, Purpose Trusts, and Stewardship Trusts—Business with a Purpose, Jan/Feb at 36.

Bove Jr., Alexander A., Go Directly to Jail, Do Not Collect $200! Do Asset Protection Trusts Carry a Mandatory “Go to Jail” Card? Should They? Sep/Oct at 8.

Dungey, Marissa, Biden’s 2024 Green Book Tax Proposals: What “Fair Share” Taxation Means for Estate Planning, Sep/ Oct at 26.

Harker, Jay E., What Could Go Rwong?

Choosing the Best Drivers for the EstatePlanning Bus, May/Jun at 12.

Burruss, Timnetra, Helping Good Get to Great: The Power of an Effective Mentoring Process, Sep/Oct at 40.

Engelhardt, Jo Ann, Helping Good Get to Great: The Power of an Effective Mentoring Process, Sep/Oct at 40.

Cain, Tandilyn, A Guide to Reconstructing GST Exemption Allocations and Calculating the Inclusion Ratio of a Trust, Nov/Dec at 49.

Engelhardt, Jo Ann, Perfect Pairings, Jan/ Feb at 52.

Abrams, Robin, The Evolution of the “PopUp,” May/Jun at 40.

Bines, Harvey E., The Corporate Transparency Act: A High-Altitude Pathway and Some Practice Considerations, Nov/Dec at 36.

Cathcart Jr., Paul M., Attempting a Weekend Taxable Gift of Securities from a Brokerage Account (If You Must), Jan/ Feb at 48.

Crowfoot, Josh, A Brief Primer on the Fiduciary Duties of Real Estate Brokers, Sep/Oct at 44.

Curatolo, Kristen A., Celebrity Estate Planning: Misfires of the Rich and Famous VI, Nov/Dec at 16.

Davis, Spencer, Let Your Light Shine Even When the Wind Blows: Special Real Property Considerations in Renewable Energy Projects, Jan/Feb at 26.

Di Scullo, Alan M., Recent Results in Business Interruption Coverage in Commercial Leases, Mar/Apr at 46.

Dougherty, James I., Biden’s 2024 Green Book Tax Proposals: What “Fair Share” Taxation Means for Estate Planning, Sep/ Oct at 26.

Drennan, William A., Leona Helmsley: The Queen of Probate & Property? Practical Drafting Tips from Her Majesty’s Wills, Jan/Feb at 12.

Engstrom, Scott M., Death, Taxes, and Retirement Account Issues, May/Jun at 36.

Espinoza, Jordan J., Using Development Agreements to Further Environmental Ends: A Case Study, Jul/Aug at 34.

Everist, Abbie M.B., A Guide to Reconstructing GST Exemption Allocations and Calculating the Inclusion Ratio of a Trust, Nov/Dec at 49.

Farach, Manuel, Federal Case Summaries, Mar/Apr at 50.

Farach, Manuel, Federal Case Summaries, Nov/Dec at 40.

Galligan Goldsmith, Jessica, Celebrity Estate Planning: Misfires of the Rich and Famous VI, Nov/Dec at 16.

Garfield, Ronald, Airbnb, VRBO, ShortTerm Rentals: Recent Developments, Enforcement Hurdles, and Mitigating Risks, Jul/Aug at 52.

Garofalo, Xenia J.L., All Right, All Right, All REIT: Complexities and Considerations of Real Estate Investment Trusts, Jul/Aug at 28.

Hawthorne, G. Trippe, Lease Work Letters, Part One: When the Landlord Performs the Work, May/Jun at 26.

Hawthorne, G. Trippe, Lease Work Letters, Part Two: When the Tenant Performs the Work, Jul/Aug at 44.

Howard-Potter, Erica, Celebrity Estate Planning: Misfires of the Rich and Famous VI, Nov/Dec at 16.

Hughes, Elizabeth M., How the US Tax Code Can Save Our Most Endangered Species, Part I, Mar/Apr at 10.

Hughes, Elizabeth M., How the US Tax Code Can Save Our Most Endangered Species, Part II, May/Jun at 50.

Ismailov, Juliya L., Tax Incentives for Conservation Easements in Headlines Lately, Sep/Oct at 58.

Johnson, Janet M., The Most Important Things to Know When Insuring Lease Work Letter Construction Projects, Part One: Liability Insurance, Sep/Oct at 47.

Johnson, Janet M., The Most Important Things to Know When Insuring Lease Work Letter Construction Projects, Part Two: Property Insurance, Nov/Dec at 24.

Kessler, Helen J., New Strategies for Reducing the Carbon Dioxide Emissions of Building Materials, Sep/Oct at 32.

Kessler, Helen J., Impact of Buildings on Global Warming, Jul/Aug at 8.

Published in Probate & Property, Volume 37, No 6 © 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.

November/December 2023 61

Kiely, John S., Celebrity Estate Planning: Misfires of the Rich and Famous VI, Nov/ Dec at 16.

Orvin, Daniel Q., Helping Good Get to Great: The Power of an Effective Mentoring Process, Sep/Oct at 40.

Thomas, Samuel F., Celebrity Estate Planning: Misfires of the Rich and Famous VI, Nov/Dec at 16.

Knaak, Frederic W., Using Development Agreements to Further Environmental Ends: A Case Study, Jul/Aug at 34.

Osborn, Nathan G., Using LLCs to Purchase and Own Rental Property, Sep/Oct at 54.

Kruse, Toni Ann, Perfect Pairings, Jan/Feb at 52.

Parthemer, Mark R., SECURE Act 2.0 Top Ten, May/Jun at 46.

Valika, Hasnain, All Right, All Right, All REIT: Complexities and Considerations of Real Estate Investment Trusts, Jul/Aug at 28.

Leroy, Olufunke, Let Your Light Shine Even When the Wind Blows: Special Real Property Considerations in Renewable Energy Projects, Jan/Feb at 26.

Parthemer, Mark R., Tax Aspects of the Inflation Reduction Act of 2022, Jan/Feb at 42.

Moore, Marie A., Lease Work Letters, Part One: When the Landlord Performs the Work, May/Jun at 26.

Moore, Marie A., Lease Work Letters, Part Two: When the Tenant Performs the Work, Jul/Aug at 44.

Morgan, Jennifer, Show Me the Money: A Primer on Real Estate Private Equity Funds, Sep/Oct at 18.

Moughal Saleem, Imaan, Maximizing Efficiency in Estate Administration: The Role of Paralegals, Sep/Oct at 36.

Nashiwa, Karen M.T., Let Your Light Shine Even When the Wind Blows: Special Real Property Considerations in Renewable Energy Projects, Jan/Feb at 26.

Nemzin, Robert M., Maximizing Efficiency in Estate Administration: The Role of Paralegals, Sep/Oct at 36.

Waldman, Amber, A Guide to Reconstructing GST Exemption Allocations and Calculating the Inclusion Ratio of a Trust, Nov/Dec at 49.

Rich, Nancy J., Environmental Diligence in the Era of PFAS: The Pitfalls of Simply Ordering the Phase I, Nov/Dec at 6.

Ward, Darnella J., Let Your Light Shine Even When the Wind Blows: Special Real Property Considerations in Renewable Energy Projects, Jan/Feb at 26.

Ross, Hunter S., Airbnb, VRBO, Short-Term Rentals: Recent Developments, Enforcement Hurdles, and Mitigating Risks, Jul/ Aug at 52.

Warley, Carol, A Guide to Reconstructing GST Exemption Allocations and Calculating the Inclusion Ratio of a Trust, Nov/Dec at 49.

Rubin, Michael H., If You’re a Good Writer, You Don’t Write Good: Better Contract Writing for Transactional Lawyers, Jul/Aug at 40.

Webel, Merrie Jeanne, Celebrity Estate Planning: Misfires of the Rich and Famous VI, Nov/Dec at 16.

Sneeringer, Michael A., Real Estate and Related Issues in the Estate Administration Process, Mar/Apr at 22.

Wright, Glenn D., The Evolution of the “Pop-Up,” May/Jun at 40.

Sobelson, Richard J., The Ultimate Green Playbook for Condos and Coops, Mar/Apr at 36.

Stutzman, David E., Celebrity Estate Planning: Misfires of the Rich and Famous VI, Nov/Dec at 16.

SUBJECT INDEX Career Development

Environmental Issues

Jo Ann Engelhardt and Toni Ann Kruse, Perfect Pairings, Jan/Feb at 52.

Elizabeth M. Hughes, How the US Tax Code Can Save Our Most Endangered Species, Part I, Mar/Apr at 10.

Jo Ann Engelhardt, Timnetra Burruss, and Daniel Q. Orvin, Helping Good Get to Great: The Power of an Effective Mentoring Process, Sep/Oct at 40.

Michael H. Rubin, If You’re a Good Legal Writer, You Don’t Write Good: Better Contract Writing for Transactional Lawyers, Jul/Aug at 40.

Condominiums Richard J. Sobelson, The Ultimate Green Playbook for Condos and Coops, Mar/Apr at 36.

Elizabeth M. Hughes, How the US Tax Code Can Save Our Most Endangered Species, Part II, May/Jun at 50.

Helen J. Kessler, Impact of Buildings on Global Warming, Jul/Aug at 8.

Helen J. Kessler, New Strategies for Reducing the Carbon Dioxide Emissions of Building Materials, Sep/Oct at 32.

Frederic W. Knaak and Jordan J. Espinoza, Using Development Agreements to Further Environmental Ends: A Case Study, Jul/Aug at 34.

Karen M.T. Nashiwa, Spencer Davis, Olufunke Leroy, and Darnella J. Ward, Let Your Light Shine Even When the Wind Blows: Special Real Property Considerations in Renewable Energy Projects, Jan/ Feb at 26.

Nancy J. Rich, Environmental Diligence in the Era of PFAS: The Pitfalls of Simply Ordering the Phase I, Nov/Dec at 6.

Estate Administration Robert M. Nemzin and Imaan Moughal Saleem, Maximizing Efficiency in Estate Administration: The Role of Paralegals, Sep/Oct at 36.

Michael A. Sneeringer, Real Estate and Related Issues in the Estate Administration Process, Mar/Apr at 22.

Published in Probate & Property, Volume 37, No 6 © 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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November/December 2023

Estate Planning Harvey E. Bines, The Corporate Transparency Act: A High Altitude Pathway and Some Practice Considerations, Nov/Dec at 36.

William A. Drennan, The Law of a Last Request, Part 1: Bury Me with My Favorite Toy, Nov/Dec at 44.

Jessica Galligan Goldsmith, Kristen A. Curatolo, Erica Howard-Potter, John S. Kiely, David E. Stutzman, Samuel F. Thomas, Merrie Jeanne Webel, Celebrity Estate Planning: Misfires of the Rich and Famous VI, Nov/Dec at 16.

Jay E. Harker, What Could Go Rwong?

Choosing the Best Drivers for the Estate Planning Bus, May/Jun at 12.

Federal Property Law Manuel Farach, Federal Case Summaries, Mar/Apr at 50.

Manuel Farach, Federal Case Summaries Nov/Dec at 40.

Insurance Alan M. DiScullo, Recent Results in Business Interruption Coverage in Commercial Leases, Mar/Apr at 46.

Janet M. Johnson, The Most Important Things to Know When Insuring Lease Work Letter Construction Projects, Part One: Liability Insurance, Sep/Oct at 47.

Janet M. Johnson, The Most Important Things to Know When Insuring Lease Work Letter Construction Projects, Part Two: Property Insurance, Nov/Dec at 24.

Leases Alan M. DiScullo, Recent Results in Business Interruption Coverage in Commercial Leases, Mar/Apr at 46.

Janet M. Johnson, The Most Important Things to Know When Insuring Lease Work Letter Construction Projects, Part One: Liability Insurance, Sep/Oct at 47.

Janet M. Johnson, The Most Important Things to Know When Insuring Lease Work Letter Construction Projects, Part Two: Property Insurance, Nov/Dec at 24.

Marie A. Moore and G. Trippe Hawthorne, Lease Work Letters, Part One: When the Landlord Performs the Work, May/Jun at 26.

Marie A. Moore and G. Trippe Hawthorne, Lease Work Letters, Part Two: When the Tenant Performs the Work, Jul/Aug at 44.

Nathan G. Osborn, Using LLCs to Purchase and Own Rental Property, Sep/Oct at 54.

Glenn D. Wright and Robin Abrams, The Evolution of the “Pop Up,” May/Jun at 40.

Real Estate Finance Jennifer Morgan, Show Me the Money: A Primer on Real Estate Private Equity Funds, Sep/Oct at 18.

Real Estate Sales Josh Crowfoot, A Brief Primer on the Fiduciary Duties of Real Estate Brokers, Sep/Oct at 44.

Retirement Planning Scott M. Engstrom, Death, Taxes, and Retirement Account Issues, May/Jun at 36.

Mark R. Parthemer, SECURE Act 2.0 Top Ten, May/Jun at 46.

Short Term Rentals

Trusts Alexander A. Bove Jr., Go Directly to Jail, Do Not Collect $200! Do Asset Protection Trusts Carry a Mandatory “Go to Jail” Card? Should They? Sep/Oct at 8.

Michael Duffy, Designing Long-Term Trusts to Hold Art and Collectibles, Jul/Aug at 20.

Susan N. Gary and Beck Groff, Patagonia, Purpose Trusts, and Stewardship Trusts— Business with a Purpose, Jan/Feb at 36.

Hasnain Valika and Xenia J. L. Garofalo, All Right, All Right, All REIT: Complexities and Considerations of Real Estate Investment Trusts, Jul/Aug at 28.

Carol Warley, Abbie M. B. Everist, Amber Waldman, and Tandilyn Cain, A Guide to Reconstructing GST Exemption Allocations and Calculating the Inclusion Ratio of a Trust, Nov/Dec at 49.

Wills William A. Drennan, Leona Helmsley: The Queen of Probate & Property? Practical Drafting Tips from Her Majesty’s Wills, Jan/Feb at 12.

Ronald Garfield and Hunter S. Ross, Airbnb, VRBO, Short-Term Rentals: Recent Developments, Enforcement Hurdles, and Mitigating Risks, Jul/Aug at 52.

Tax Paul M. Cathcart Jr., Attempting a Weekend Taxable Gift of Securities from a Brokerage Account (If You Must), Jan/Feb at 48.

James I. Dougherty and Marissa Dungey, Biden’s 2024 Green Book Tax Proposals: What “Fair Share” Taxation Means for Estate Planning, Sep/Oct at 26.

Scott M. Engstrom, Death, Taxes, and Retirement Account Issues, May/Jun at 36.

Elizabeth M. Hughes, How the US Tax Code Can Save Our Most Endangered Species, Part I, Mar/Apr at 10.

Elizabeth M. Hughes, How the US Tax Code Can Save Our Most Endangered Species, Part II, May/Jun at 50.

Juliya L. Ismailov, Tax Incentives for Conservation Easements in Headlines Lately, Sep/Oct at 58.

Mark R. Parthemer, Tax Aspects of the Inflation Reduction Act of 2022, Jan/Feb at 42.

Published in Probate & Property, Volume 37, No 6 © 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.

November/December 2023 63

THE LAST WORD Rhetoric, a Jury of 500, and the Asyndetic Mic Drop In law school, I was introduced to the adage of three courtroom approaches: “When the law is on your side, speak to the judge. When the facts are on your side, speak to the jury. When neither is on your side, pound your shoe on the podium and shout.”

Regardless of the origin of this saying, I recently was reminded of it while re-reading Aristotle’s The Art of Rhetoric (Hugh Lawson-Tancred ed. & trans. Penguin Classics 2004).

Lawson-Tancred’s introduction summarizes Aristotle’s analysis that there are three forms of proof in rhetoric: those achieved by argument, those achieved by character, and those achieved by emotion. Id. at 16–17. The parallel is obvious but deserves further exploration.

Rhetoric is the art of written or spoken communication seeking to persuade. Frequently, we read accusations negatively, labeling the speaker as one spouting rhetoric, but such accusations are often misguided. What the speaker often proclaims is the target presenting false arguments. But that is sophistry, not rhetoric. Others use rhetoric as a denouncement of an appeal to emotion. Emotion indeed is a part of rhetoric, but an appeal to emotion is pathos, and true rhetoric involves the trifecta of logos, pathos, and ethos— logic, emotion, and credibility.

Attorneys use rhetoric, albeit only sometimes intentionally, so the historical context is enlightening. In the days of Aristotle (384–322 BC), the Athenian justice system had several remarkable features. For one, the state had no monopoly on prosecution. Any citizen could complain about another. (This, The Last Word Editor: Mark R. Parthemer, Glenmede, 222 Lakeview Avenue, Suite 1160, West Palm Beach, FL 33401, mark. parthemer@glenmede.com.

unfortunately, resulted in a form of politicizing as the juries became quick to rule against those Athenians from wealthier neighborhoods and backgrounds.) Id. at 11.

Another feature was the structural size. The ultimate deciding body within the judicial system was known as the Assembly. The Assembly contained about 6,000 people. The Assembly typically had a full agenda, so its members focused on making quick decisions. A solution was to create the Council of Five Hundred to serve as the deliberative body that would listen to arguments and make a recommendation to the Assembly. In this separation of duties, the Council determined facts (i.e., jury) and the Assembly applied the law (i.e., judge).

The Council heard two types of matters: government proposals and legal complaints. Government proposals involved one or more citizens seeking to persuade the Council to support a government initiative. Legal complaints could be described in modern terminology as both civil and criminal.

The task was to argue persuasively to the Council of Five Hundred, regardless of whether the individual was the protagonist or antagonist. Like the practice of law today, a pathway to success is crystal clear communication—know your story and tell it well.

Indeed, Aristotle sees rhetoric as an elevated talent. He concludes that the form of rhetoric needed to be successful in front of the Council is a techne. A techne is defined as the domain of practical wisdom and craft knowledge, for Aristotle analogous to what an episteme is to theoretical reasoning. Aristotle also sets forth a third form, phronesis, which is ethical knowledge. A deeper dive into these can be found in his Nicomachean Ethics.

The takeaway is that rhetoric, the art

of oral persuasion, is worthy of perfecting. Perfecting oral persuasion requires knowledge of the craft of persuasion and is built upon the proper integration of argument, character, and emotional appeal.

Aristotle argues that there are two necessary components and two optional ones. Id. at 246. They are, in order of appearance: 1. Introduction (optional)—like a trailer to a movie, designed to identify the theme and generate interest.

2. Presentation (mandatory)—the goals are to refute any prejudice set against the presenter and to put forth the presenter’s perspective of the relevant facts.

3. Proof (mandatory)—demonstrate the presenter’s facts and refute those of the other side.

4. Epilogue (optional)—the ending must be crisp and effective and comprise four elements: favorably present oneself or unfavorably present the adversary, amplify one’s proof or diminish the adversary’s, bring the listener to emotion, and recapitulation.

Accordingly, the ending should not be an oration, but a compelling peroration and ideally asyndetic—a statement without conjunctions, such as “I came, I saw, I conquered.” The text itself demonstrates an asyndetic ending to the epilogue with, “I have spoken, you have heard, you have the facts, judge.” Id. at 261.

Some readers are litigators; others are not. But all of us find ourselves needing to communicate persuasively, whether to a judge, a client, or a family member. Examine how you go about doing so, and perhaps you will increase your success not by pounding the table and yelling, but by following a carefully crafted format, such as Aristotle’s.

I wrote, you read, now do. n

Published in Probate & Property, Volume 37, No 6 © 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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November/December 2023

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