Probate & Property - January/February 2024, Vol. 38, No. 1

CANNABIS LEASES: LANDLORD AND TENANT CONSIDERATIONS

ADVANCE DIRECTIVES: DRAFTING AND IMPLEMENTATION

OPERATING EXPENSES IN COMMERCIAL LEASES

VOL 38, NO 1 JAN/FEB 2024

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

The Law of a

Last Request Bury Me with My Favorite Toy

2023 RPTE LAW STUDENT WRITING COMPETITION WINNERS We are delighted to announce the winners of the 2023 RPTE Law Student Writing Competition.

FIRST PLACE: Everyone Deserves Autonomy: Making Advance Care Planning Accessible for All

by Amelia Tidwell, Pepperdine Caruso School of Law SECOND PLACE: Stopping the Architects of Urban Sprawl: How Urban Sprawl Facilitators Can Be Stopped through Litigation and City Planning Reform

by Caden Burchianti, George Washington Law School Amelia Tidwell, the first-place winner, will receive $2,500 cash, a oneyear free membership in the Section, and free round-trip airfare and weekend accommodations to attend the 36th Annual RPTE National CLE Conference, May 8-11, 2024, in Washington, DC. She is eligible for a full-tuition scholarship to the University of Miami School of Law’s Heckerling Graduate Program in Estate Planning OR Robert TraurigGreenberg Traurig Graduate Program in Real Property Development for the 2023–2024 or 2024–2025 academic year. In addition, Amelia’s essay will be considered for publication in a future issue of the Real Property, Trust & Estate Law Journal.

36th Annual RPTE National CLE Conference and Leadership Meeting

Caden Burchianti, the second-place winner, will receive $1,500 cash.

Caden’s submission will also be considered for publication in a future issue of the Real Property, Trust & Estate Law Journal.

The goal of the RPTE student writing contest is to encourage and reward law student writing on the subjects of real property or trust and estate law. The essay contest is designed to attract students to these law specialties and to encourage scholarship and interest in these areas.

Articles submitted for judging are encouraged to be of timely topics and must not have been previously published. Information for the 2024 writing contest will be made available soon!

May 8-11, 2024 Capital Hilton, Washington, D.C. The Section sends a huge thank you to Michael Ostermeyer and the

2023 selection committee: Robert Paul, Edward Brading, Amy Milligan, Amy Hess, Susan Gary, Ray Prather, Andrea Boyack, and Jeff Hopkins.

Details for the 2024 contest will be made available soon at:

ambar.org/rptewriting

PROFESSORS’ PROFESSORS’ OR RN N EE R R CC O

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November /December 2023

SJeptember ctOber2024 2023 11 anuary/F/O ebruary

CONTENTS January/February 2024 • Vol. 38 No. 1

6 FEATURES 6

18

The Law of a Last Request: Bury Me with My Favorite Toy, Part 2

By William A. Drennan

18

28

32

39

DEPARTMENTS

Cannabis Leases: Landlord and Tenant Considerations

By Jack Fersko

4

Uniform Laws Update

Advance Directives: Drafting and Implementation

12

Keeping Current—Property

By Allison R. Clapp and Ashley F. Lanzel

24

Keeping Current—Probate

An Introduction to Operating Expenses in Commercial Leases

58

Technology—Probate

By Scott W. Fielding and Travis A. Beaton

60

Land Use Update

Solving Generation-Skipping Transfer Tax Problems: Five Practical Remedies to Resolve Exemption Allocation Issues

62

Career Development and Wellness

64

The Last Word

By Carol Warley, Abbie M. B. Everist, Amber Waldman, and Rachel Ruffalo

44

Representations and Warranties in Real Estate Sales Contracts

By Norman R. Newman

50

The Charitable Trust Doctrine: Application to Unrestricted Gifts

By Richard A. Newman

Published in Probate & Property, Volume 38, No 1 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

2

January/February 2024

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

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

ABA PUBLISHING Director Donna Gollmer

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

Art Director Andrew O. Alcala

Managing Editor Erin Johnson Remotigue

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

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

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

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

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

The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either the American Bar Association or the Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered the rendering of legal or ethical advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel.

These materials and any forms and agreements herein are intended for educational and informational purposes only. © 2024 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. Digital subscription packages for ABA periodicals are available through HeinOnline. If interested, former print subscribers and ABA non-members can visit www.heinonline.org. 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) 2852221, 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 38, No 1 © 2024 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.

January/February 2024 3

UNIFORM LAWS U P D AT E 2023 Legislative Update During 2023, state legislatures considered almost two hundred bills to adopt uniform laws recommended by the Uniform Law Commission (ULC). This column summarizes 2023 legislative activity involving uniform real property acts and uniform trust and estate acts.

Real Property Arkansas and Washington adopted the Uniform Easement Relocation Act, which provides an exception to the common-law rule requiring the easement holder and the owner of the burdened estate to agree to the relocation of an easement. The uniform act allows the owner of a burdened estate unilaterally to relocate an easement under a courtsupervised process if the owner proves that the relocation will not cause any material harm to the easement holder’s interests. Four states have now adopted this uniform law.

The District of Columbia and Washington both adopted the Uniform Partition of Heirs Property Act (UPHPA), bringing the total number of enactments to 23. Idaho, Kentucky, and North Carolina saw UPHPA bills introduced, but the bills did not pass in the 2023 session.

Three other UPHPA bills (in Massachusetts, Michigan, and New Jersey) were still pending at press time.

Six states introduced bills to adopt the Uniform Real Property Transfer on Death Act (URPTODA), but none passed in 2023. Connecticut, Delaware, Kentucky, New Hampshire, North Carolina, and Rhode Island will all likely carry

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.

over their bills to 2024 or reintroduce the act in a future legislative session. The total number of URPTODA enactments stands at 19, with another nine states allowing TOD transfers of real property under a non-uniform statute that predates the uniform act.

The Georgia legislature failed to pass the latest version of the Uniform Residential Landlord and Tenant Act. A Maine bill to enact the 2021 amendments to the Uniform Common Interest Ownership Act will be carried over to the 2024 session. A District of Columbia bill to enact the Uniform Commercial Real Estate Receivership Act and a Massachusetts bill to adopt the Uniform Real Property Electronic Recording Act were both pending at press time.

In 2024, the newly approved Uniform Unlawful Restrictions in Land Records Act will be available for states to consider. The act provides a uniform procedure for removing unlawful restrictions from the public land records while preserving each property’s chain of title and historical record. Drafted with significant input from the American Land Title Association and the Property Records Industry Association, this act will help bring uniformity to an area of the law where states have implemented highly variable procedures.

Trusts and Estates Arkansas and Colorado were the first states to adopt the Uniform Community Property Disposition at Death Act. An update of a 1971 uniform law, this act provides rules and procedures for probate courts and trustees in common-law states to properly dispose of property that was acquired as community property in another jurisdiction. A similar bill is pending in the District of Columbia City Council, while bills in Nebraska and North Carolina failed to pass last year.

Kansas and Maryland were the 14th and 15th states to adopt the Uniform Trust Decanting Act (UTDA). The District of Columbia and Massachusetts also considered the UTDA as this issue went to press.

The District of Columbia and Vermont adopted the Uniform Power of Attorney Act (UPOAA) in 2023, and bills in Massachusetts and Michigan were awaiting a hearing. The UPOAA governs financial powers of attorney and has been adopted in 31 jurisdictions.

California became the seventh state to adopt the Uniform Fiduciary Income and Principal Act, the latest set of accounting standards for trusts.

A similar bill passed both houses of the Missouri legislature with slight differences, but the versions were not reconciled before the session calendar ended.

Hawaii was the latest state to consider the Uniform Guardianship, Conservatorship, and Other Protective Arrangements Act (UGCOPAA), a comprehensive statute that brings guardianship law into the modern age. The bill did not pass but is being studied by an interim committee for a future legislative session. UGCOPAA was recommended for enactment in all states by the US Senate Special Committee on Aging and the 10 constituent

Published in Probate & Property, Volume 38, No 1 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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January/February 2024

UNIFORM LAWS U P D AT E

RPTE BOOKS

organizations comprising the National Guardianship Network.

The Uniform Directed Trust Act (UDTA) was passed by both houses of the California legislature and was awaiting Governor Newsom’s signature at press time. Sixteen states have adopted the UDTA, and another bill is pending in the District of Columbia. A Vermont UDTA bill did not pass but will likely be reintroduced in 2024.

The District of Columbia, Idaho, and Minnesota adopted the Uniform Electronic Wills Act (UEWA) in 2023, while similar bills failed in Missouri and Texas.

One UEWA bill remains under consideration in New Jersey. Meanwhile, Illinois became the first state to adopt the comprehensive Uniform Electronic Estate Planning Documents Act, also introduced in Missouri, Oklahoma, and Texas.

Taken together, these two acts authorize using electronic documents and signatures by estate planners and their clients.

In 2024, the newly revised Uniform Health-Care Decisions Act will offer states a comprehensive statute to govern advance directives, healthcare powers of attorney, and health-care surrogates.

This act addresses several issues that

most current state laws do not, including mental health-care directives, conflicting orders, and challenges to a determination that a patient lacks the capacity to make his own health-care decisions.

ULC legislative counsel can consult and assist with enactment efforts in any state. For more information about uniform real property acts, please contact ULC Legislative Counsel Jane Sternecky at (312) 450-6622 or jsternecky@ uniformlaws.org. For uniform trust and estate acts, contact ULC Chief Counsel Benjamin Orzeske at (312) 450-6621 or borzeske@uniformlaws.org. n

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Published in Probate & Property, Volume 38, No 1 © 2024 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.

January/February 2024

5

The Law of a Last Request

Bury Me with My Favorite Toy, Part 2

By William A. Drennan

Published in Probate & Property, Volume 38, No 1 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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January/February 2024

C

an you legally arrange to be buried with your teddy bear in one hand and your favorite comic book in the other, wearing your Michael Jordan jersey and your gold wedding band? Would it matter if none of your beneficiaries wanted any of these items and would just sell them as quickly as possible? What if the items had a combined value of over $15 million? See Juliene Kim, A Michael Jordan Jersey Is Sold for over $10 Million, Setting a World Record, NPR (Sept. 16, 2023), https://tinyurl.com/2yufkhaj; The 16 Most Expensive Comic Books Ever Sold, CGC Comics (Jul. 14, 2022), https://tinyurl.com/34xv2dwk (reporting a sale of Superman #1 for $5.3 million); Cheyenne Lentz, 12 Teddy Bears That Are Worth a Fortune (Sept. 6, 2018), insider.com (reporting a Steiff teddy bear sale for $143,000). What if their combined value was under $1,000? What if all you wanted was 10 $100 bills stuffed in your pocket just before they seal the casket?

Part 1 (37 Prob. & Prop. (Nov/Dec 2023) at 44) explored client motives for such last requests, described real life (and death) fact patterns, set forth the argument that such directions are void because they encourage grave robbing, and discussed techniques estate planners might use to counter the grave robbing argument, including avoiding public disclosure. This Part 2 explains why this is a difficult practical and legal area, sets forth the argument that these directions are void because they violate public policy by wasting property, and discusses what estate planners might recommend in response. Although this Part 2 often refers to the client’s “will,” as discussed in Part 1, the client and estate planner may choose to include the direction in a nonpublic document incorporated by reference into the client’s will.

Getty Images

Practical and Legal Difficulties Timing Mismatch Between Burying the Body and Dealing with Property. We bury the dead promptly. Most funerals in North America are conducted in one week, or two weeks if circumstances require a delay. How Long Can You Delay a Funeral?, Beyond the Dash (May 12, 2021), https://tinyurl.com/3ctc848m. The client’s religious affiliation may require burial within a day if it prohibits embalming, such as with Muslim and traditional Jewish funeral practices. See id. (“[A]fter 24 hours the body will need some level of embalming.”).

State statutes and common laws facilitate fast burial by immediately authorizing a living person (usually the surviving spouse and then the next of kin) to make arrangements for the burial, cremation, or other appropriate disposition. Tanya D. Marsh, You Can’t Always Get What You Want: Inconsistent State Statutes Frustrate Decedent Control over Funeral Planning, 55 Real Prop. Tr. & Est. L.J. 147 (2020). In addition to the method of disposition, this authority also extends to choices for the funeral, casket, tombstone, and the funeral home or other provider. This immediate authorization helps “relieve . . . funeral professionals from liability.” Id. at 161.

In regard to the decedent’s ability to direct or influence the method of disposition and related matters, 42 states have statutes granting “the decedent . . . the right to express a personal preference regarding the disposition of [their] remains,” usually under a last will, but “[o]nly six states . . . expressly grant decedents a statutory right to determine the disposition of their own remains.” Id. (listing Arizona, Florida, Kansas, New York, Oklahoma, and South Dakota) (emphasis added). Forty-eight states have a statute allowing the decedent to designate an agent to exercise this “right of sepulture,” id. at 163–64, and the “vast majority of states” have a statute that determines who shall take custody and control of remains if the decedent neither gave instructions nor designated an agent. Id. at 163 (authorizing the surviving

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 38, No 1 © 2024 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.

January/February 2024

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Although a decedent may state his funeral and other burial instructions in his last will, the decedent likely will be buried before the will is admitted to probate.

spouse, and then the next of kin in most circumstances).

In contrast to the fast burial process, transferring property under the decedent’s last will, through the probate system, can be slow. The total probate process, involving filings with the court, protecting and investing the assets, notifying the interested parties, paying debts, settling claims, filing tax returns, and, after all other steps, transferring the decedent’s property can often take a year or longer. Depending on the jurisdiction, it may take the local probate court weeks (or even a month or more) just to issue letters testamentary appointing the executor, who will have the authority to deal with the decedent’s property. Thus, although a decedent may state his funeral and other burial instructions in his last will, the decedent likely will be buried before the will is admitted to probate and before the court authorizes an executor, and long before the executor will make substantial transfers of property.

Planning for Temporary Storage. One response to the need to bury the body quickly, and deal with the property slowly, might be to authorize or prearrange temporary storage of the body until issues regarding the burial of property in the decedent’s casket are resolved. For example, in the “famous Ferrari” unreported case from 1977, Sandra Ilene West directed in her last will that she be buried in one of her Ferrari autos. While those involved waited

for an order from the court, Sandra’s body was held temporarily in a mausoleum in Los Angeles. Timothy Fanning, Bury Me in My Ferrari, San Antonio Express-News (Mar. 22, 2023), https:// tinyurl.com/28yxrjfs. After the California judge concluded there was “no law preventing . . . burial in [a] Ferrari,” see Sports Car Burial OK, Evening News (Newburgh, N.Y.), Apr. 12, 1977, at A1, Sandra’s body was removed from the L.A. mausoleum, and Sandra and her Ferrari were buried in a San Antonio, Texas, grave 17 feet long, 9 feet across, and 9 feet deep, next to her predeceased husband.

Relying on the Living and Considering If They Must Comply. A decedent must rely on the living to carry out her burial requests for obvious reasons.

As a result, the testator and the estate planner need to consider whether a living beneficiary with possession of the prized item will be required, allowed, or prohibited from placing it in the casket and will be motivated to insert.

Because of the scarcity of legal authority regarding a last request to bury a prized possession, the rules for traditional burial and funeral arrangements may be instructive. The law surrounding even these traditional matters is convoluted. Generally, an executor is obligated to follow the terms of the decedent’s will. Matter of Estate of Sandefur, 413 N.E.2d 309, 311 (Ind. Ct. App. 1980) (discussing the “duty to defend the will”). Also, conditions

imposed upon a bequest generally are enforceable unless they violate public policy. Jeffrey G. Sherman, Posthumous Meddling: An Instrumentalist Theory of Testamentary Restraints on Conjugal and Religious Choices, 1999 U. Ill L. Rev. 1273, 1276. In addition, state statutes and common laws generally recognize a decedent’s right to dispose of his property at death as he wishes by a last will.

See In re Caper’s Estate, 34 Pa. D. & C.2d 121, 138 (Orphan’s Ct. 1964) (concluding, however, that a direction in the decedent’s will to kill his two pet Irish setter dogs upon his death did not qualify as a “disposition”).

We bury bodies quickly, however, and there generally will be no court-appointed executor with legal obligations at the time of burial. As discussed above, state laws clearly designate who has authority to dispose of the remains, but that person typically is obligated only to make a respectful (or decent) disposition consistent with social norms. Often, a beneficiary will incur the burial and funeral expenses, and a legal question will be whether those expenses were a proper charge against the decedent’s property (and if the beneficiary used her own money, whether she should be reimbursed from estate property). Indeed, funeral and burial expenses, and the cost of a tombstone, often are included in the definition of “claims” against the estate.

See, e g., Unif. Prob. Code § 1.201(6); Mo. Rev. Stat. § 472.010(3).

In regard to the testator’s ability to control the nature and amount of his burial and funeral expenses, a leading treatise indicates that such a direction may be carried out only if it is reasonable. 22 Am. Jur. 2d Dead Bodies § 27 (2023 update). This approach is consistent with the law of certain honorary trusts. It allows the testator to create a power exercisable by the living, but it does not allow the decedent to create a legal obligation. See Adam J. Hirsch, Bequests for Purposes: A Unified Theory, 56 Wash. & Lee L. Rev. 33, 46, 52, 56 (1999) (referring to directions to spend money post-mortem on a mausoleum or a tomb, or to pay for masses

Published in Probate & Property, Volume 38, No 1 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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January/February 2024

or prayers for the decedent, as directions for a “personal purpose” rather than for a public or charitable purpose); but see In re Baeuchle’s Will, 82 N.Y.S.2d 371, 375 (Surr. Ct. 1948) (concluding that a direction in the decedent’s will to purchase a cemetery plot at Woodlawn Cemetery in Brooklyn, build a mausoleum on the plot, and pay the residue to Woodlawn Cemetery for perpetual care created an “executorial dut[y]” in part because Woodlawn Cemetery could enforce the terms). As discussed below, if the testator’s direction nevertheless violates public policy because it is wasteful, the direction is void, and a beneficiary following the direction will be liable for damages to anyone who would have received a bigger bequest, or otherwise was harmed. Restatement (Third) of Trusts § 124 cmt. g, illus. 5 (Am. Law Inst. 2013).

In regard to a testator’s direction to be buried with a prized possession, this same approach likely should apply. The direction benefits no living person, so presumably no living person would have the right to enforce the direction in court. Accordingly, no living person would have a legal obligation to perform it.

Providing the Beneficiary with an Economic Incentive to Grant the Last Request.

If the beneficiary possessing the prized item has only a power (and not an obligation) to grant the decedent’s last

request, providing an economic incentive may be helpful. This was done in the “famous Ferrari” case. Although there was no reported judicial opinion, news reports stated that Sandra West’s will provided that a beneficiary (her brother-in-law) would receive $2 million (of her total $5 million estate, $24.9 million in 2023 dollars) if she was buried in the Ferrari; the beneficiary would receive only $10,000 if not. Jim Motavalli, You Can Take It with You, If the Grave Is Deep Enough, N.Y. Times, Feb. 24, 2022; Jim Dossey, Can I Be Buried in My Car? Yes, You Can!, Dossey & Jones (Dec. 11, 2013), https:// tinyurl.com/2aadm37j. In response to the question, the court concluded that there was no law prohibiting burial in a Ferrari. Thereafter, the beneficiary arranged for her burial in the Ferrari and presumably received the incentive bequest.

Creating this type of financial incentive for a beneficiary likely guarantees a court battle because the amount of the bequest for different individuals changes based on whether the court declares the direction void as contrary to public policy.

Key Legal Issue: Public Policy and Economic Waste Although not discussed in the only reported case regarding the burial of a testator’s prized possessions, see

Meksras Estate, 63 Pa. D. & C.2d 371 (C.P. Orphans’ Ct. 1974), commentators point out that testamentary directions may be void because they violate public policy for being wasteful. See, e.g., Abigail J. Sykes, Waste Not, Want Not: Can the Public Policy Doctrine Prohibit the Destruction of Property by Testamentary Direction?, 25 Vt. L. Rev. 911 (2001); Kaity Y. Emerson & Kevin Bennardo, Unleashing Pets from Dead-Hand Control, 22 Nev. L.J. 349, 366–69 (2021).

With the paucity of direct authority on burying prized possessions, the legal authorities on directions to destroy property at death may provide insight on how to draft directions. Property rights often are described as including the ability to exclude others from using or enjoying an item. See Thomas W. Merrill, Property and the Right to Exclude, 77 Neb. L. Rev. 730 (1998).

Consistent with that view, during lifetime, a property owner is free to destroy his property, if the act of destruction does not violate an environmental or other law. Lior Jacob Strahilevitz, The Right to Destroy, 114 Yale L.J. 781, 789 (2005). For example, many famous artists, including Jasper Johns, Georgia O’Keefe, Claude Monet, Ted DeGrazia, and Michelangelo, have destroyed their work. See Tori Campbell, 9 Famous Artists Who Destroyed Their Own Work, Artland, https://magazine.artland.com.

Directions to destroy at death are

Published in Probate & Property, Volume 38, No 1 © 2024 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.

January/February 2024 9

In two cases declaring a decedent’s direction to raze a residence void as a violation of public policy, apparently there was nothing in the testator’s will or in the testimony or circumstances presented at trial to explain the testator’s motive.

more closely scrutinized because the dead do not suffer a financial loss, and, instead, the financial loss is borne by the living. Also, the dead will not suffer the “interpersonal costs that living persons pay for eccentric behavior, that is resentment . . . among family members and others,” John H. Langbein, Burn the Rembrandt? Trust Laws’ Limit on the Settlor’s Power to Direct Investments, 90 B.U. L. Rev. 375, 378 (2010), or the vitriol from social media. The restraint of selfinterest vanishes at death.

The Restatement of Trusts unequivocally condemns a direction to “throw [$1,000] into the sea upon my death.”

It provides that a person who follows such a direction will be liable to any beneficiary incurring a financial loss.

Restatement (Third) of Trusts § 124 cmt. g; see id., illus. #5. At first glance, this absolute rule on destroying cash may seem appropriate, and it is consistent with an old case, In re Scott’s Will, 93 N.W. 109 (Minn. 1903), but could other factors be relevant? Some mourners have slipped cash into a decedent’s coffin shortly before it was sealed in recognition of the decedent’s generosity during life. David Dishneau, Public Funeral Planned for Flamboyant Drug Kingpin (Nov. 19, 1986), https://apnews. com/article/99c89c. And what if certain coins or currency had sentimental value for the decedent? And does the

Restatement’s use of the $1,000 amount imply that a person could follow a direction to destroy a smaller amount without liability?

Consistent with older precedents, the Restatement also states that directions are unenforceable if the “purpose is capricious.” Id.; Langbein, supra, at 376 n.8 (listing cases). A direction does not have a capricious purpose if “it satisfies a natural desire which normal people have,” even if “no living person benefits from its performance.”

Restatement of Trusts (Third) § 124 cmt. g. These standards create considerable room for argument and discretion— What are natural desires? Can natural desires become unnatural when taken to extremes? Who are these “normal people”? Must “normal people” have a certain degree of mental acumen? Are rich people normal? Do we apply the “normal people” test taking into account the particular testator’s wealth, age, geographic location, and religious beliefs?

Turning to case law, four cases involving a testator’s direction to destroy a home dominate the discourse in this area. The cases are split, with two enforcing the testator’s direction to destroy and two refusing to enforce.

Together, they suggest the importance of explaining the testator’s motivation.

In the two cases declaring a decedent’s direction to raze a residence void

as a violation of public policy, apparently there was nothing in the testator’s will or in the testimony or circumstances presented at trial to explain the testator’s motive. Eyerman v. Mercantile Trust, 524 S.W.2d 210 (Mo. App. 1975) (involving one judge writing the opinion, one judge concurring, and one judge writing a blistering dissent); Matter of Pace, 400 N.Y.S.2d 488 (N.Y. Surr.

Ct., Cayuga Cty. 1977). In these cases, the courts noted the harm to the living, including the harm to the local county from lost property tax revenues, harm to the immediate neighbors for diminished property values (as a result of the creation of an adjacent vacant lot), and harm to the residuary beneficiary for the missed inheritance and the cost of the demolition (minus the resale value of the land). In Eyerman, the net monetary loss was approximately $40,000, equivalent to $224,000 in 2023 dollars.

In the two cases enforcing a testator’s direction to destroy her residence, the executor presented circumstances and testimony to explain the testator’s motive. In National City Bank v. Case Western Reserve, 369 N.E.2d 814 (C.P. Ohio 1976), the testator’s last will simply directed that after the removal of the contents, the executor should “raze” her (magnificent) residence to the ground.

The remainder beneficiary losing out on a valuable inheritance was a charity, Case Western Reserve University. At trial, all the parties agreed to allow her attorney to testify regarding the spectacular features of the residence, the fact that the “surrounding neighborhood had changed over the years from exclusively upscale residences to one in which the older homes were being converted to [commercial] uses . . . and that she had a great deal of affection for [her home],” that she felt that commercial use would be a “debasement,” and that “therefore, she wanted it destroyed.”

Id. at 816–17. The court held that her destruction direction was not against public policy. In the written opinion, the court never questioned why the testator would consider a commercial use a “debasement” or why destruction would be preferable to debasement.

In the other case approving a

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destruction of real property, the testator’s last will was “direct, sparse, and uncluttered, a reflection of the woman herself.” The will directed the executor to “demolish my home,” pay all related costs, and then offer to sell the vacant land to the City of Buffalo for $100.

Matter of Beck, 177 Misc. 2d 203 (Surr.

Ct. N.Y. 1998). Despite the failure to state a motive in the will, the court discussed the history of the residence and the testator’s devotion to her home and the nearby church (which was her residuary beneficiary). The City had sought to take the home in condemnation 25 years earlier, and the testator (and her sister) resisted. Id. at 205. Eventually, the building was moved to a different lot, and the related agreements documented the testator’s intentions to have the building demolished after her death and to give the city a $100 purchase option on the lot. Id. at 205. There was no indication that the testator’s statement of intent was legally binding, and the court concluded that the treasured home “was hers to dispose of as she intended.” Id. at 206-7 (emphasis added). Although acknowledging the “unorthodox and novel nature of the . . . testamentary direction,” the court issued “an order granting the right to demolish.”

A few authorities address whether testamentary directions to destroy personal property violate public policy as wasteful and therefore are void. On the one hand, a court declared that a direction to destroy the residue of money or cash remaining after the payment of expenses, debts, and specific and general bequests was void. In re Scott’s Will, 93 N.W. 109 (Minn. 1903). Similarly, in dictum, a court stated that a testamentary direction to destroy $50,000 in negotiable instruments would be void. Matter of Pace, 400 N.Y.S.2d at 493. Also, courts have concluded that a testamentary direction to euthanize a companion animal is unenforceable as a matter of public policy even though, during lifetime, a pet owner generally would have the legal right to humanely euthanize the animal. See, e.g., In re Caper’s Estate, 34 Pa. D. & C.2d 121 (1964) (including a famous tribute

to the character of dogs from a closing argument in an older case); see also Emerson & Bennardo, 22 Nev. L.J. at 366–69 (citing three unreported cases).

On the other hand, in Ahmanson Foundation v. United States, 674 F.2d 761 (9th Cir. 1982), the Ninth Circuit, in dictum, indicated that a testamentary direction to destroy personal letters and other correspondence would be enforceable. Id. at 768 (stating that only the value of the resulting ashes would be subject to federal estate tax); see also Sykes, supra, 25 Vt. L. Rev. at 926–27 (discussing situations in which executors failed to follow directions to destroy correspondence).

Responding to a Potential Economic Waste Argument The “destruction of the residence” cases suggest the importance of documenting the decedent’s motives for wanting to be buried with the prized possession, although some courts have allowed testimony of survivors. In the “famous Ferrari” case, Sandra Ilene West’s housekeeper “told the judge . . . [Sandra] was fascinated with Egyptian history . . . [and that is where] she got the idea . . . .”

Fanning, supra.

Also, in the last will (or other document), it may be helpful to include (i) language placing the request to bury in financial context—“I expect to leave over $X to my beneficiaries (if they comply with my last request), and for my last request, I merely am directing that I be buried with an item worth approximately $Y”; (ii) a description of the sentimental value of the item—“That wristwatch means more to me than any other person because I bought it at a yard sale where I met my future spouse (and, besides, not many people wear wristwatches anymore)”; and (iii) an explanation that the testator saved money in other areas—“I thought about taking a monthlong vacation in Europe, but I saved the money and used it to buy a copy of Amazing Fantasy #15 (the first comic book appearance of Spider-Man), and I’m directing that I be buried with it.”

In addition, to counter the argument that the last request is capricious, in the sense that it was a hasty decision

subject to change, the testator might execute a series of wills and codicils (or other documents) over a period of years that all include (or incorporate) the last request. The testator would want to retain all of these documents in safe keeping.

Conclusion This article began by asking if your direction to be buried with prized possessions, such as a teddy bear, a comic book, an MJ jersey, or a wedding band, would be effective. Practical difficulties abound, but the person who possesses these items might be more likely to have an opportunity to carry out your wishes if you have authorized (and perhaps arranged for) temporary storage in a mausoleum or other appropriate cold storage facility while any issues are addressed. In addition, that beneficiary may need a meaningful financial incentive to grant a last request that may be unpopular with other family members and may be ridiculed on social media.

Clearing these practical difficulties, the effectiveness may turn on whether a court would find the direction void under the public policy doctrine because of the economic waste. Historically, the public policy doctrine has been called the “unruly horse of the law” for its unpredictability. See Dillan McQueen, Platforms and Police Departments, 50 U. Mem. L. Rev. 199, 223 (2019) (citing Richardson v. Mellish (1824), 130 Eng. Rep. 294, 303 (HL)).

Nevertheless, there are steps that an estate planner might recommend for the client’s last will (or incorporated document), such as thoroughly setting forth the client’s motives, describing the item’s special value to the testator, and emphasizing that the majority of the testator’s wealth will be left for the beneficiary in comparison to the small value of what the testator desires to “take with him.” Generally, many people are buried with their wedding bands and everyone is buried wearing something, but whether a particular last request is void due to economic waste should depend, at least in part, on the resale value of the item and the size of the remaining estate. n

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KEEPING CURRENT PROPERTY CASES EASEMENTS: Presumption of permissive use is rebutted when the use is the only, or most economical, access to user’s land. In 2013, Stowe purchased 15.8 acres of landlocked property. Her predecessors had access to the property for agricultural and recreational purposes by crossing a farm road on the Smiths’ property that led to a nearby highway. Before her purchase, Stowe received permission from the Smiths to use the farm road to reach the highway. Later Stowe decided to build a home on her property and sought an express easement from the Smiths, which was refused. Stowe then filed suit, claiming a prescriptive easement.

The trial court found a nonexclusive right of way over the farm road. The Smiths appealed, opposing the finding and also seeking to limit the scope of any easement to agricultural and recreational purposes. The supreme court affirmed, acknowledging that normally there is a presumption of permissive use over a neighbor’s land, which does not ripen into a prescriptive easement even when used for over 20 years. The presumption is overcome, however, if the claimed use was the only means of ingress and egress to the claimant’s property. In such a situation, the landowner is charged with presumptive knowledge that the use is under a claim of right. The owner must take some affirmative action to restrict the neighbor’s use of the right-of-way to prevent the creation of a prescriptive easement.

Here, it was undisputed that the farm road was the only means of vehicular ingress and egress to the Stowe Keeping Current—Property Editor: Prof.

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

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

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

property for more than 20 years, either

by Stowe herself or by her predecessors in title, establishing the requisite claim of right. The holding was not a total victory for Stowe because the prescriptive easement she acquired was limited to agricultural and recreational purposes.

Smith v. Stowe, 2023 Ala. LEXIS 106, 2023 WL 5989274 (Ala. Sept. 15, 2023).

EMINENT DOMAIN: Title acquired by municipality through eminent domain does not relate back to filing of condemnation action to relieve owner of obligation to pay property taxes. The City of Joliet filed a condemnation complaint against the plaintiff ’s apartment complex in 2005. The city later acquired a fee-simple title to the property in 2017. During the pendency of the condemnation action, the property owners continued to operate the apartment complex and continued paying property taxes without protest. In 2018, the property owners sought a refund of more than $6 million in property taxes paid during the period of condemnation litigation. The plaintiffs argued the law dictated that once condemnation proceedings were complete, the title received by the government body related back to the date of the original filing, thus entitling the property owners to a refund. The trial court dismissed the complaint. The appellate court affirmed in part and reversed in part, agreeing with the plaintiffs that once the condemnation proceedings

were complete and title to the property conveyed to the city, the title “related back” to the date of filing the condemnation complaint, such that any taxes paid during this period were not lawfully owed. The supreme court reversed, overruling the precedent relied on by the appellate court, City of Chicago v.

McCausland, 41 N.E. 2d 745 (Ill. 1945).

The court declared that the filing of a condemnation complaint is not a taking. Instead, the plaintiffs remained owners of the property—they had control over the property and were not deprived of any government benefits— during the time of the condemnation proceedings. The court concluded that it would be unreasonable to hold that they had no duty to pay property taxes accruing during that time. MB Financial Bank v. Brophy, 2023 Ill. LEXIS 464 (Ill. Sept. 21, 2023).

HOMESTEAD: Exemption requires both occupancy and ownership of the claimed property. Brady was the sole owner of a single-family residence where she lived with her husband and children. She filed a bankruptcy petition, claiming a $120,000 homestead exemption and later amending the petition to claim an additional $120,000 exemption on behalf of her non-owner spouse. The New Hampshire homestead statute provides: “Every person is entitled to $120,000 worth of his or her homestead, or of his or her interest therein, as a homestead.” N.H. Rev. Stat. § 480:1. The trustee in bankruptcy objected to the second claim. After a hearing, the bankruptcy court concluded that to maintain a homestead right under the statute, a person claiming the exemption must demonstrate both occupancy and an ownership interest in the homestead property.

Brady appealed the ruling to the federal district court, which certified to the state supreme court the question

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of whether a non-owning spouse who occupies a residence with an owning spouse has a homestead right. The court answered in the negative. The precise language of the statute means a possessory interest and refers to ownership. That a non-owning spouse may be entitled to notice of actions against the property does not give rise to a homestead right. Brady v. Sumski, 2023 N.H. LEXIS 144 (N.H. Aug. 17, 2023).

INVERSE CONDEMNATION: Buyer of land cannot recover for injury from flooding that first occurred before buyer acquired title. In 1993, the Maslonkas bought 525 acres of land near the Box Canyon Dam, constructed by a public utility district (PUD) in 1955 to provide low-cost electricity to its customers. In operating the dam, the PUD periodically raised and lowered the water levels, which occasionally caused flooding above prescribed levels set by the Federal Energy Regulatory Commission and by an express easement granted by the Maslonkas’ predecessor in title. In 2016, the Maslonkas sued the PUD, alleging inverse condemnation and claims for trespass, nuisance, and negligence. The trial court granted the PUD’s motion to dismiss, finding the subsequent purchaser rule precluded a later purchaser from bringing an inverse condemnation for a taking that occurred before acquiring title. The trial court also found a prescriptive easement over the

Maslonkas’ land in favor of the PUD. The appellate court reversed, ruling that the PUD had the burden to show that its operations permanently reduced the value of the property before the Maslonkas acquired title. The supreme court reversed, first finding that the subsequent purchaser rule is one of standing, not an affirmative defense that a defendant must establish. As the Maslonkas failed to show that increased flooding occurred after they acquired title, they lacked standing to bring the action. On the tort claims, the court explained that ordinarily, when a landowner establishes a taking by inverse condemnation, actions in tort for injury to the property taken are precluded.

That rule does not change when the takings claim is not available because of the subsequent purchaser rule.

Maslonka v. Public Util. Dist. No. 1, 533 P.3d 400 (Wash. 2023).

LANDLORD-TENANT: Landlordtenant relationship may be found based on conduct despite motel agreement’s describing relationship as innkeeper-guest. The plaintiffs, who rented rooms at the Efficiency Lodge extended-stay motel, fell behind on their rent and were threatened with immediate eviction. They sued for injunctive relief, claiming eviction was improper without judicial dispossessory proceedings as required by the state’s landlord-tenant law. The motel argued the plaintiffs signed agreements expressly stating their relationship was one of innkeeper-guest and not landlord-tenant, and the hotel, therefore, was entitled to lockout the residents without using judicial process. The trial court agreed with the plaintiffs, and the appellate court affirmed. The supreme court vacated the judgment and remanded Box Canyon Dam in Maslonka v. Public Utility District No.1. National the case for a deterArchives and Records Administration, Public domain, via Wikimedia mination of whether Commons. a landlord-tenant

relationship existed under the new guidance provided in the court’s opinion. The supreme court stated that a landlord-tenant relationship exists when a property owner grants another the right to possess and enjoy the use of the owner’s property either for a fixed term or at the grantor’s will. The grant can be express or implied from the circumstances. Mere possession of the land of another raises a rebuttable presumption that some type of tenancy exists, and using the property as a home ordinarily establishes possession for purposes of a landlord-tenant relationship. Further, the intent of the parties, as shown by their written agreement or conduct, is a key factor. In contrast, an innkeeper-guest relationship is created when a person pays a fee to a hotel or inn “for the purpose of entertainment at that inn.” Ga. Code § 43-21-1.

Whether a landlord-tenant relationship was created will turn on whether the motel granted the plaintiffs the right “simply to possess and enjoy the use of ” their rooms. Despite the language referring to an innkeeper-guest relationship, it was particularly relevant that the plaintiffs occupied their rooms as their homes, using the motel’s address to register their children for school, to receive mail, and even as their driver’s license address. They also decorated their rooms, in some cases buying furniture for their spaces. The court explained it is the substance of the relationship that is determinative, “no matter the nomenclature assigned.” Efficiency Lodge, Inc. v.

Neason, 889 S.E. 2d 789 (Ga. 2023).

MORTGAGES: Mortgagor has no right to challenge assignment of note and mortgage. A mortgagor claimed that an assignee could not enforce the mortgage on his property because the original loan agreement was with the assignor, and the mortgagor had not consented to the assignment. The mortgagor also claimed that he had a due process right to notice of the assignment and that the assignee violated the Fair Debt Collection Practices Act (FDCPA) in seeking to enforce the mortgage. The trial court dismissed each of the claims. The Ninth Circuit Court

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of Appeals affirmed. First, the court pointed out that under California law, a borrower generally cannot object to the assignment of a note and deed of trust because a promissory note is a negotiable instrument, which the lender may sell without notice to the borrower. In this respect, an assignment is an agreement between the assignor and the assignee only. Furthermore, the mortgagor consented in advance to the assignment by a term in the deed of trust providing that “[t]he note or a partial interest in the Note . . . can be sold one or more times without prior notice to Borrower.” Second, the mortgagor had no due process claim because under California law a mortgagor has no property interest in the identity of the holder of the note. In any case, a constitutional due process claim can be asserted only against a state actor, and neither party to the assignment is a state actor. Finally, the court ruled that a mortgagee enforcing a deed of trust is not a “debt collector” as defined in the FDCPA because it was not in the business of collecting or attempting to collect debts owed to another. See 15 U.S.C. § 1692a(6). Harris v. New Rez, LLC, 2023 U.S. App. LEXIS 24098, 2023 WL 5925909 (9th Cir. Sept. 12, 2023).

RESTRICTIVE COVENANTS: Dissolution of preliminary injunction against violation of covenants must meet same test for granting the

injunction. Morning Star sought and obtained a preliminary injunction against the owners of a neighboring lot from building a second story on their home in violation of a restrictive covenant that allowed only one-story buildings on the lot. Later, the trial court dissolved the injunction on the basis that the offending lot owners’ removal of the second-story window facing Morning Star’s property was a significant change in facts that tipped the balance of hardships “heavily” in the offending landowners’ favor. The Ninth Circuit Court of Appeals reversed, stating that even assuming the removal of the window is “a significant change in facts,” it did not warrant dissolution of the injunction. Under Winter v. Natural Resources Defense Council, 555 U.S. 7 (2008), the same factors determine both whether an injunction should be granted and whether the injunction should be continued. First, there was a likelihood of success on the merits, as state law precedent upheld a permanent injunction against the construction of a second-story unit in violation of a restrictive covenant. Second, Morning Star was likely to suffer irreparable harm in the absence of preliminary relief—state law recognized that the violation of a property right itself constitutes irreparable harm.

Third, the balance of the equities and hardships weighed in favor of injunctive relief, notwithstanding the removal

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of the second-story window. The trial court concluded that the removal of the second-story window addressed the privacy invasion but failed to consider the other stated purpose of the covenant, i.e., to benefit Morning Star’s property. The trial court discounted the inherent harm caused by the violation, which, under state law, courts must strictly enforce absent extraordinary circumstances. The court of appeals did not address the fourth factor, whether the injunction is in the public interest, because the trial court did not address it, and, at best, it would be a neutral factor. Morning Star, LLC v. Canter, 2023 U.S. App. LEXIS 20686, 2023 WL 5092764 (9th Cir. Aug. 9, 2023).

STATUTE OF FRAUDS: Agreement signed after purchase of home supports claim to joint ownership.

Shields and Wilkinson, an unmarried couple, decided to buy a home where they would live, along with Wilkinson’s grandmother, Clark. Clark had suffered a mild stroke, and Shields and Wilkinson decided that they would care for her. The three of them pooled their resources to purchase a new home.

Shields applied for a Veterans Administration mortgage loan, and Clark sold her existing home, contributing $106,000 of the proceeds as the down payment for the new home. While Wilkinson was out of town, Shields took Clark to the lender’s office, where she was asked to sign a statement that the $106,000 was a gift to Shields with no expectation of repayment. After Clark signed the gift letter, the purchase closed, with the title to the home conveyed only to Shields. Then Wilkinson consulted an attorney to obtain protection for Clark. The attorney drafted and Shields signed a memorandum that outlined how funds would be divided between Shields and Wilkinson upon the sale, transfer, or other disposal of the new house and acknowledged that “the parties used $106,000.00 from … Wilkinson’s family” to purchase the property. Later Shields’s and Wilkinson’s relationship deteriorated, and Shields listed the property for sale. Thereafter, Clark’s attorney sent

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a letter demanding her equity interest in the property. When Shields did not respond, Clark sued, seeking a preliminary injunction against the sale or that the proceeds be held in trust until her claim could be resolved. The trial court found that there was an agreement to purchase the property jointly and the memorandum was sufficient to satisfy the statute of frauds, Alas. Stat. § 09.25.010, or constituted an admission of a contract by Shields under Alas. Stat. § 09.25.020(4). The court ordered Shields to reimburse Clark for the down payment. The supreme court affirmed. Although there was no dispute that Clark provided the down payment, it remained to be determined what the parties intended by that payment. The evidence was clear that the parties intended to combine resources to purchase the property to take care of Clark as she aged. That the money was an unconditional gift was belied by the subsequent memorandum; instead, it was an investment in the property. The court rejected the assertion that the statute of frauds requires the signature of both parties, instead of only the party to be charged. In any case, the memorandum would serve as an admission of the contract, thereby taking the matter out of the statute of frauds. Shields v.

Clark, 534 P.3d 94 (Alaska 2023).

STATUTE OF LIMITATIONS: Statute of limitations on home equity mortgage loan runs from lender’s acceleration of debt, not from borrower’s first default in paying installments. In 2006, McElfish obtained a first mortgage loan on his residence and later, from a different lender, obtained a home equity line of credit (HELOC) loan for cash advances up to $150,000, which carried a maturity of 20 years. McElfish was required to make monthly payments. The note and mortgage gave the lender the right to require payment of the entire outstanding balance if McElfish defaulted, but the lender reserved the right to delay exercising any right under the agreement. After McElfish failed to make payments, the first lender foreclosed and sold the property in 2012.

The foreclosure sale did not generate any surplus funds to pay off the HELOC debt. In 2019, Piedmont purchased the HELOC debt, gave notice to McElfish of the acceleration of the outstanding balance of $147,569, and demanded payment. McElfish did not respond, and Piedmont sued. McElfish moved to dismiss, asserting that the four-year statute of limitations began to run when he first missed a payment in 2011—not when Piedmont exercised the acceleration right in 2019. The trial court ruled that the HELOC was an installment contract such that the statute of limitations ran from the time of the first missed payment and had run out by the time of the suit. The court of appeals reversed. McElfish’s duties to pay the full amount were divisible in that the loan agreement required payment in full by a certain date, and simultaneously granted the lender the choice of whether to accelerate the maturity date when McElfish missed a payment or at any time thereafter. This choice necessarily contemplated a breach of McElfish’s duty to make monthly payments being divisible from his duty to pay the full amount. As such, Piedmont’s suit was timely as to all missed monthly payments within the four years preceding its filing as well as to all future payments because Piedmont accelerated those payments within that four-year “look back” period. Piedmont Capital Mgmt., L.L.C. v. McElfish, 312 Cal. Rptr. 3d 664 (Ct. App. 2023).

ZONING: Special overlay zone prohibiting smoke shops and tobacco stores is not spot zoning. The City of Myrtle Beach, a town economically driven by tourism, decided to restrict certain business types and practices after receiving complaints from tourists and residents. To improve the “family-friendly” nature of its downtown, in 2018 the city, according to the state statute authorizing overlay zones, created the Ocean Boulevard Entertainment Overlay District (OBEOD).

The new district addressed the special public interests in the area and was consistent with the objectives stated in the city’s comprehensive plan. The

zone prohibited smoke shops, tobacco stores, sales of sexually explicit material, and cannabidiol merchandise. All businesses engaged in the prohibited activities immediately were deemed non-conforming uses and ordered to cease those activities or risk suspension or revocation of their business licenses, although they were given a four-month amortization period. The affected businesses filed suit, seeking various remedies including a declaration that the ordinance was unconstitutional.

The zoning board administrator and the board of zoning appeals upheld the validity of the ordinance. The circuit court affirmed, finding the appellants’ claims to be meritless. The businesses then appealed to the supreme court, which also affirmed and upheld the ordinance. The court began its analysis by noting the presumed constitutionality of municipal enactments; a court will not disturb them unless arbitrary and capricious or lacking a reasonable relation to a lawful purpose. Although a finding of spot zoning means that the government has failed this test, the businesses here failed to meet their burden of proof. Traditional spot zoning singles out and reclassifies a relatively small portion of land in a manner different from the surrounding properties, thereby benefitting certain owners to the detriment of others. Yet, spot zoning is present only if the small zone is not justified by the city’s comprehensive plan of zoning or is for mere private gain as distinguished from the good of the common welfare. Traditional spot zoning is compared to reverse spot zoning, which occurs when a zoning ordinance restricts the use of property when virtually all adjoining neighbors are not subject to those restrictions.

Here, because the prohibitions in the OBEOD were not the result of a zoning “island” that came from rezoning surrounding areas, there was no reverse spot zoning. Nor was there unlawful traditional spot zoning because the overlay was consistent with the comprehensive plan, it was fairly debatable that it was enacted to promote the public welfare, and there was no clear injustice to the appellants because their

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businesses were not taken. ANI Creation, Inc. v. Myrtle Beach Bd. of Zoning Appeals, 890 S.E.2d 748 (S.C. 2023).

LITERATURE LANDLORD-TENANT: In Fever Check: A Status Report on Judicial Treatment of COVID-19-Related Real Property Issues, 58 Real Prop. Tr. & Est. L.J. 47 (Spr. 2023), Prof. Michael Allan Wolfe provides an interim review of the judicial landscape in eviction litigation resulting from government responses to the recent pandemic. Prof. Wolfe reviews state and federal decisions, including decisions by the US Supreme Court, concluding that, so far, the results have been quite predictable.

Courts have interpreted new mandates and old laws in a manner that favors government entities over the owners of private property. The judicial decisions are consistent with traditional landlordtenant precedents when emergency COVID regulations were established and then lifted. The article focuses on rulings related to business-oriented government policies, noting that court decisions were not issued in an appreciable number until 2022. Many courts are still wrestling with the challenges of setting good policy and precedent for the future when the country is almost certain to face a pandemic again. Prof.

Wolfe notes that courts are not best suited for the prevention nor resolution of severe emergencies, but he warns about the “abdication of responsibility and politicization of science by the elected branches” and advises that we (presumably meaning the legal profession and judiciary) have an “obligation to ensure that tools and doctrine are available to protect the common good.”

One gathers the author believes the legal system is more responsible and less politicized than the other branches of government. However, many will say that is highly doubtful, especially where COVID and evictions have been concerned with purely residential tenants. The article informs that state high court decisions following the expiration of government tolls on evictions during COVID have been mostly uniform in

rejecting common-law doctrines such as force majeure, frustration of purpose, and impossibility of performance.

Similarly, federal appellate courts have overwhelmingly rejected commercial landlord arguments based on takings law or the Contracts Clause of the federal constitution. Prof. Wolfe rightfully raises concerns about the Supreme Court’s decision to vacate the stay of the district court judgment overturning the nationwide eviction moratorium issued by the Centers for Disease Control in Ala. Ass’n of Realtors v. Dep’t of Health and Human Services, 141 S. Ct. 2485 (2021). He considers the case to be a “shadow docket” decision that also involved the “major questions” doctrine to conclude the federal agency overstepped its legislative bounds.

Courts exercising veto power during an emergency in response to government agency actions under existing federal legislation do engender valid concerns about the proper balancing of private financial concerns against the health, safety, and welfare of the public at large.

The article also provides an interesting twist on judicial activism, or perhaps re-activism or retribution, discussing more recently appointed conservative judges being unwilling to continue following established precedent. Viewing Dobbs v. Jackson Women’s Health Organization, 142 S. Ct. 2228 (2022), and that majority’s test to determine when precedent should be overturned, Prof. Wolfe found that in the COVID space, courts at every level have not uniformly followed that lead, instead willingly ignoring precedent that previously reflected what he portrays as more balanced landlord-tenant interests in eviction proceedings. Changes due to COVID declarations may have warranted a different path or justify a different evaluation, but we will have to wait for more judicial decisions to hopefully provide a stronger basis for deciding one way or another.

LAND USE: It is well-known that zoning exacerbates housing shortages as it impedes housing production. Profs.

Moira O’Neill, Eric Biber, and Nicholas J. Marantz, in Measuring Local Policy

to Advance Fair Housing and Climate Goals through a Comprehensive Assessment of Land Use Entitlements, 50 Pepp.

L. Rev. 505 (2023), see zoning reform as a remedy. They focus on the state of California, describing its aggressive efforts to loosen the grip of zoning, traditionally a peculiarly local matter, on housing access. California now allows duplexes and fourplexes on parcels zoned for single-family housing and also has increased density on some urban parcels to ten units per acre without environmental review. Whether and to what extent these measures are efficacious or make a meaningful difference has yet to be assessed. The point of the article is the challenge of measurement—evaluating how past laws and new measures operate within cities across the state. But identifying reliable measurement tools and criteria is a difficult proposition. The authors survey the various legislative measures for addressing housing issues, present various assessment approaches and perspectives, and report the results of how cities interpret and carry out state directives. They focus particularly on restrictive local regulations that inhibit the statewide goals of increased housing access as well as combating climate change.

PUBLIC LANDS: In Public Ownership, Public Rights: Recreational Stream Access Decisions in the Mountain West, 23 Wyo. L. Rev. 73 (2023), Prof. Reed D. Benson analyzes stream access cases to give insight into ways to resolve inevitable conflicts between members of the public and private landowners over the use of what appears to be public waters, but which traverse private lands. Conflicts between these groups of claimants have become violent in recent years— some landowners shooting recreational boaters—as the interest in kayaking and canoeing has grown. Of the six western states discussed, only one, Colorado, recognizes a right to float as stemming from the state constitution, which declares that water belongs to the state.

The other states hold varying views on the public’s right of access, ranging from the right of recreational users to

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KEEPING CURRENT PROPERTY

touch the water’s privately owned beds and banks to the right of landowners to exclude entirely. Prof. Benson discusses the foundational decisions on recreational stream access and the animating background principles involving state control of water resources. He offers some guidance on fashioning a rule that better accommodates these competing claims, but at a minimum, he calls for clarity in delineating public versus private rights, which would go a long way in these times of water scarcity.

In Corner Crossing: Unlocking Public Lands or Invading the Airspace of Landowners, 46 Pub. Land & Resources L. Rev. 91 (2023), Prof. Kevin Frazier considers the more than 8 million acres of public lands that are “corner-locked” lots, meaning that the publicly owned lots meet at their corners but are surrounded by privately owned lots. He offers a lively picture of recreationists “corner-hopping” (literally and sometimes with step ladders) the corner-locked boundaries to avoid a trespassing charge and sometimes the odd shotgun, to get to public land. This phenomenon is largely the result of centuries-old land grants creating the checkerboard pattern of lots, railroads, and the public holding alternatively odd and even lots. Apart from a herculean effort at redefining such property rights at the corners by state and federal governments, he believes a rigorous application of the Unlawful Inclosures Act of 1885, 43 U.S.C. § 1063, might be a partial solution. That act aims to prevent the blocking of federal lands by adjoining landowners. Courts have interpreted the act to mean that private ownership extends only up to but not over the border with public land. Although the act, along with land exchanges, may play a part in opening up public lands, Prof. Frazier believes that efforts on other fronts must be deployed, not the least of which is engaging landowners toward a cultural shift to encourage cooperative relations.

LEGISLATION NEW YORK amends the property condition disclosure statement. The

amendments eliminate a seller’s option to give the buyer a $500 credit in lieu of completing the disclosure statement and require disclosures on whether the property is located in a floodplain and has ever experienced flooding. 2023 N.Y. Laws 484.

NORTH CAROLINA prohibits unfair real estate service agreements.

The law prohibits real estate brokerage agreements entered into by owners of residential real estate that have a duration of more than one year and prohibits agreements that bind the owner’s successors. The law makes void the recording of real estate agreements

and liens or encumbrances arising out of the agreements. 2023 N.C. Sess.

Laws 117.

OREGON adds bias crime to protected characteristics for access to housing. Landlords may not evict, fail to renew, or refuse to enter into a tenancy because the tenant is a victim of a bias crime. Bias crime is defined in Or. Rev. Stat. §147.380R to include an offense involving the hostile expression of animus toward another person relating to the person’s perceived race, color, religion, gender identity, sexual orientation, disability, or national origin. 2023 Ore. Laws 549. n

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Published in Probate & Property, Volume 38, No 1 © 2024 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

CANNABIS LEASES Landlord and Tenant Considerations

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By Jack Fersko

he economic impact of the cannabis industry in the US is expected to exceed $100 billion in 2023. One of the motivating forces behind the push for legalization of cannabis in many US states is the revenue generated for state and local governments. As of May 2021, states reported $7.9 billion in tax revenue from legal marijuana sales. The tax revenue from the cannabis industry has been a boon to municipalities as well. It is estimated that Seattle earned approximately $9.08 million in tax revenue in 2022, and Los Angeles upwards of $55.1 million.

Although excitement for the marijuana industry continues to grow nationally, there nevertheless remains a cloud in the form of the federal government. Marijuana remains a Schedule I drug under federal law, specifically the Controlled Substances Act. 21 U.S.C. § 801 et seq.

Federal Overview US Constitution. The Supremacy Clause of the US Constitution provides that federal law preempts state law. U.S. Const. amend. X. The Tenth Amendment provides that powers not specifically delegated to the federal government by the Constitution belong to the states. The federal government cannot compel the states either to enact laws that are in the federal interest or to spend money enforcing federal laws. Nevertheless, even if a person is permitted by state law to use marijuana or conduct business within the industry, such person remains subject to criminal and civil action under the full panoply of applicable federal laws.

Controlled Substances Act. Marijuana is a Schedule I drug under Title II of the Controlled Substances Act. Under § 841 of the Act, those violating the Act may be liable for a fine of upwards of $10 million for an individual and $50 million if a nonindividual defendant, and for a Jack Fersko is a partner of Greenbaum, Rowe, Smith & Davis, LLP, where he co-chairs the Real Estate Department and heads the Cannabis Law Group. He is a current co-chair of the Committee on Groups and Substantive Committees and a former Council member of the RPTE Section and chair of the Leasing Group. This article is an abridged version of an article initially published in the ACREL Papers, March 2023.

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repeat offender, a fine of upwards of $20 million for an individual and $75 million if a nonindividual defendant, all depending on the quantity possessed, distributed, dispensed, or manufactured.

In addition, the same section authorizes imprisonment of up to life, again depending on the quantity possessed, distributed, dispensed, or manufactured.

Important to those operating in the real estate industry, potential liability under § 856(a) of the Act also rests with those who lease space for manufacturing or distributing marijuana, as well as those who manage such facilities. Fines and imprisonment are not the only risk presented at the federal level, as property forfeiture is another remedy available to the federal government.

FinCEN Guidance. The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued “Guidance to clarify Bank Secrecy Act (BSA) expectations for financial institutions seeking to provide services to marijuana-related businesses.” The introductory language of the guidance is important because it provides that its intent is to clarify “how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations” and expects that the guidance will “enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.”

The FinCEN guidance sets out a protocol of due diligence that a financial institution should undertake of a customer to assess the risk of providing financial services to the customer. In addition, a financial institution providing banking or other services to a marijuanarelated business must file suspicious activity reports because of its illegality under federal law, even when legal under state law.

Appropriation Bills. Since December 2014, the appropriation bills enacted by Congress have barred the Department of Justice from using appropriated funds to prosecute operators of medical marijuana facilities functioning in compliance with state medical marijuana statutes.

Tax Issues. Although the medical marijuana business is illegal under federal law, such businesses are still required to

pay federal income taxes. Although most businesses are entitled to claim deductions against their gross income to arrive at their respective taxable net income, under § 280E of the Internal Revenue Code of 1986, as amended, deductions for expenses incurred in the business of producing or selling marijuana are prohibited. The prohibition extends to all of the businesses’ deductions, even those that are not illegal per se, such as rent, telephone, salaries, etc. The result is higher taxes to be paid by a marijuana operation, which is a factor to be considered by a landlord when evaluating a prospective tenant’s financial condition.

Selected Lease Issues Although marijuana-related businesses have been legal in certain states for some time now, the field remains in its infancy, and the full panoply of issues parties will need to address (and how) in commercial and industrial real estate transactions is not yet clear.

To begin, there are title insurance issues pertaining to cannabis-related businesses. For example, recently, the author has learned that Westcor Land Title Insurance Company will insure title involving a cannabis-related facility with an insurance limit of $20 million. Schedule B will, however, include a coverage exception for violations of any Schedule I drug laws.

To the current understanding of this author, however, Westcor is the exception.

Chicago Title Insurance Company, Old Republic National Title Insurance Company, and First American Title Insurance Company will not offer title insurance or settlement or escrow services for marijuana-related transactions.

There also is a host of banking issues facing any cannabis-related business.

Traditional institutional lending is problematic. Notwithstanding the FinCEN guidance, parties within the traditional lending community are concerned about the potential of federal money-laundering charges if they provide banking services to cannabis-related businesses. Many businesses lack a sufficient management track record, earnings history based on audited financial statements, and, most importantly, viable collateral—a lender

cannot take possession of growing plants and finished products and sell such collateral to satisfy the business debt. As such, the industry has, in part, turned to private debt and equity sources of capital and credit unions.

In addition, there is a host of issues a landlord and tenant must address when undertaking a lease transaction involving a cannabis-related business. Some themes have developed. Below is a very general discussion of a limited number of issues to evaluate in a lease transaction.

Due Diligence. One of the first steps a landlord should take when considering whether to lease property to a cannabis-related business is whether the lease will violate any existing loan covenants, including those related to legal compliance. If so, a landlord will need to either turn down the transaction or seek alternative financing, in which latter event the landlord may face a prepayment penalty for the early payoff of its existing loan.

The ability and cost to refinance the property and the cost of any prepayment fee must be factored into the landlord’s evaluation of the economics of the deal with the cannabis-related business in order to assess whether to move forward with the lease. In addition, as with all lease transactions, a landlord needs to determine whether its loan covenants require lender approval of the lease transaction. Often, a breach of this covenant can result in a landlord-borrower violating a nonrecourse loan provision, thereby converting the loan to a recourse loan. If required, a landlord should discuss the transaction with its lender early on to determine if the lender will approve the lease. A tenant must undertake a similar evaluation because it does not want to invest in a lease negotiation or operate under an assumption that its real estate needs have been satisfied, only to find out that there is a threshold lender consent issue that cannot be overcome.

The landlord and the tenant should confirm early on in the transaction that the municipality will permit the use, and that there are no zoning restrictions that will negatively affect the planned operations, including by way of example, location, hours of operation, and advertising. It is also important for the landlord

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and the tenant to understand what local permits, approvals, licenses, variances, and waivers, if any, are required for the tenant’s operations at the leased premises; whether there is a limit on the number of cannabis operations that are allowed within the municipality and, if so, how many for each of the various types of operations (e.g., cultivation, manufacturing, wholesaling, and retail); whether there is an open license application process or one that is limited to once per year; and what process the municipality will follow in reviewing and approving applications.

Finally, the landlord should investigate the tenant’s capital and financing plans to ensure the tenant is well capitalized and has the requisite financing to construct its facility and operate its business. To this end, the landlord should obtain a description of the improvements to be made to the leased premises, including any enhancements to, and effects on, the electrical, ventilation, plumbing, and waste disposal systems and structure, as well as a capital improvements budget.

A landlord also needs to consider some of the economic “oddities” of the cannabis market, including the effect of Section 280E and the cost of banking for a cannabis operation (which, anecdotally, the author understands can range upwards of $5,000 per month) on a tenant’s net profits and cash flow.

Letters of Intent. Very often, parties will enter into a letter of intent to set forth the key business issues for a lease transaction. This is particularly significant in a cannabis lease setting because there may be a time lag between the date on which the parties enter into the transaction and when the tenant secures all licenses, permits, and approvals at the local and state levels to permit it to commence operations. Typically, a tenant will have to show regulators that it has control of a site for its operations as a part of the licensing process. For a landlord, this can mean a property will be committed for a tenancy before possession is delivered and business commences. Usually, a landlord will require a tenant to make nonrefundable payments of an agreed-upon amount during this preliminary period. Although a tenant may not commence operations,

In states that allow both medicinal and recreational marijuana-related businesses, it is important to understand that each has specific licensing requirements and limitations.

a tenant may be permitted to commence certain preliminary alterations so long as they are of a nonstructural nature and some security is posted to cover restoration should the tenant not secure all requisite licenses, permits, and approvals to commence operations. Below are some general points for parties to consider including in a letter of intent for a cannabis operation, in addition to those points that generally are included in a non-cannabis lease transaction letter of intent: • Type of license to be secured; • Period for securing the license at the state and local levels; • Requirement that the tenant apply for and diligently pursue approvals; • Payments due to the landlord during the application process; • Requirement for the tenant to deliver to the landlord all applications and notices of any hearings and decisions; • Termination rights if municipaland state-required licenses are not secured within an agreed-upon timeframe; and • A landlord acknowledgment of the tenant’s intended use of the premises and its illegality at the federal level.

Permitted Use. If a property owner is prepared to lease to a cannabis business and has satisfied itself from a financing standpoint, then the property owner must examine what statutory or regulatory impositions it may confront. For example, in New Jersey a landlord is considered a “vendor-contractor.” N.J. Admin.

Code § 17:30-6.8(s). As such, a landlord in New Jersey may be subject to, and any cannabis business that enters into a lease in New Jersey needs to include a

provision requiring that a landlord agree to submit to, a financial probity review. A landlord must be prepared for the Cannabis Regulatory Commission to review a litany of documentation and information, including: • The entity’s organizational chart and business formation documents; • Pending and past litigation for the previous five years; • Documentation for any company in which the entity owns a 25 percent or more ownership interest; • Tax returns; • Minutes of meetings and resolutions passed by the entity’s governing board during the previous two calendar years; • Financial statements, bank statements, and notes and loans payable and receivable; and • Any other information that the Commission deems relevant.

A landlord must enter such transactions with its eyes wide open and understand that its tenant is operating in a highly regulated industry.

In states that allow both medicinal and recreational marijuana-related businesses, it is important to understand that each has specific licensing requirements and limitations. Therefore, the use clause should delineate with some specificity the limitation on the use and tie the use to the permits required for, and issued to, the cannabis business. A tenant, however, should consider reserving a right to expand into other licensed cannabis businesses in addition to what may initially be applied for or operated, as the regulations may permit multiple licensure.

Finally, a landlord should consider that

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odors may be emitted, particularly in a multi-tenanted facility, and appropriate mitigation methods should be required (such as air scrubbers), and with respect to certain processes that are highly flammable, the landlord should consider whether they should be permitted, even if licensed.

Prohibited Use. Just as there are certain permitted uses that need to be expressly addressed within a lease, so too are there certain prohibited uses, which, depending on the license under which the cannabis business will operate, a landlord must be prepared to accept. For example, in New Jersey, a cannabis retailer may not operate in a location in which there also operates “a grocery store, delicatessen, indoor food market, or other store engaging in retail sales of food; or … a store that engages in licensed retail sales of alcoholic beverages. …”

Compliance with Law. Operation of a cannabis facility is illegal under federal law. Consequently, there should be a carve-out from any federal law compliance obligation, limited to this finite situation, because there remain a multitude of other, and unrelated, federal laws with respect to which ongoing compliance should be required, including, for example, the Americans with Disabilities Act and the Occupational Safety and Health Act. In addition, similar to the permitteduse clause discussed above, the obligation of the cannabis business to comply with all of the relevant provisions of the medical and adult use cannabis laws and the related regulations should be delineated clearly and unambiguously. From a landlord’s perspective, a tenant’s obligation to comply with these laws and regulations

should include any capital expenses required in connection with such compliance. These may arise from security and ventilation requirements, among other regulations. A landlord also should consider ongoing evaluation of the tenant’s operations consistent with the standards of the FinCEN guidance.

Consideration should also be given to a waiver of a defense to the enforcement of a lease or guaranty predicated on the federal illegality of the use. An example of such a lease clause is as follows: Tenant acknowledges that the use, storage, possession, distribution, and sale of cannabis remains illegal under federal law, and that a license is required from the State of [__________] [and the City of ________________] for the operation of the Premises for the Permitted Uses. Tenant waives any defense, legal and equitable, to the enforcement of this Lease, premised on (a) the fact that the Permitted Uses are illegal under federal law; (b) the fact that the Lease may commence prior to the issuance of a license from the State of [__________] [and the City of ________________], or both, for the Permitted Uses; (c) the fact that the Permitted Uses cannot be carried out if the Tenant fails to secure or maintain a license from the State of [__________] [and the City of ________________]; or (d) any similar facts, conditions, or circumstances.

The parties should also consider a similar clause for any lease guaranty.

Controlling Law and Jurisdiction. The

lease should spell out that all disputes will be governed by state law, not federal law, and that the state courts will have exclusive jurisdiction so that matters do not end up before a federal court that may well not recognize the legality of a stateauthorized cannabis operation. To this end, the parties should consider including a waiver of the right to commence an action in, and to transfer an action to, the federal courts. A landlord also should require the same waiver from all guarantors of a lease.

Security, Maintenance, Repair, and Replacement. Cannabis laws and regulations usually impose specific security obligations. A tenant therefore needs to reserve the right to undertake such security procedures and alterations.

Because a tenant may need to make a number of improvements to the premises in conjunction with its operations, including modifications to HVAC systems, security measures, and piping associated with cultivation activities, a landlord should require that a tenant provide the landlord with all plans and specifications pertaining to such work. In addition, both parties would be well served to establish very clear restoration requirements, and from a landlord’s perspective, determine any additional security for restoration.

Utilities. Marijuana-related businesses place a high demand on water and other utilities, including electricity. If not separately metered, consider submetering at the tenant’s expense, or provide for these utilities to be reasonably estimated by the landlord.

Common Areas. Although a landlord may control the common areas in a multi-tenanted facility, a landlord should avoid any liability for a failure of another tenant or any third party to abide by any restrictions that may be imposed upon the tenant under applicable cannabis laws and regulations. For example, what if a third party engages in unlawful drug activity affecting the tenant’s license?

Similarly, a tenant needs to examine the use of the common area and whether there is a need for some responsibility to be imposed on the landlord to protect the tenant’s license.

Default and Termination. A landlord should have a right to declare a default,

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or reserve a right of termination, in the event that federal law enforcement priorities change, a federal enforcement action is commenced against the landlord or its property, insurance requirements cannot be satisfied, or a necessary license is suspended or revoked. A tenant should have the same concerns and negotiate for similar termination rights. The parties will have to wrestle with whether notice and cure rights should apply to any of these situations, particularly a suspension or revocation of a license, and whether a legitimate appeal of such license suspension or revocation stays termination. The landlord will have to factor in the implications of any of these scenarios on its financing covenants in determining a negotiation position.

In addition, since a license-holder may be required to go through an annual license renewal process at both the municipal and state levels, both the landlord and tenant should reserve a right of termination should a license not be renewed. The issue that will be front and center in such a situation will concern a termination fee should the tenant fail to receive a renewal license, particularly if due to an act or omission in the operation of the business.

Indemnification. Because of the continuing illegal nature of a marijuanarelated business at the federal level, high security risks, and potential criminal and civil forfeiture, a landlord needs a broad and well-funded indemnity. In addition, opponents of marijuana-related businesses have used theories of common law nuisance and the federal RICO law to block cannabis operations. It may well be that a landlord is made a party to such litigation, potentially materially and adversely affecting the landlord’s own business investment and financing covenants. An indemnity that appropriately addresses such potential issues is warranted and should be given careful consideration, along with meaningful collateral to backstop the indemnity.

Rent and Method of Payment. A landlord should require that all rent obligations be paid by the tenant by either wire transfer or check and should expressly prohibit the payment of rent in cash. A landlord may want to consider charging

percentage rent as a part of the tenant’s rental obligation. If so, it will be important to confirm that this is permitted under the jurisdiction’s statutory and regulatory structure.

Further Assurances. The cannabis laws and regulations are often changing, and as a result, the requirements for a licenseholder may require further assurance, certifications, disclosures, and assistance from a landlord. As such, a tenant should require a landlord to provide such further assurances as may be necessary in connection with a license-holder’s renewal of its license or obtaining an additional form of cannabis license.

On a similar level, a landlord should consider a requirement for a tenant to pay to a landlord any additional fees, taxes, or related costs that may be incurred specifically in connection with the cannabis activity/business conducted on the property, including increased insurance and financing costs.

Insurance. A landlord must understand both the scope and quality of the insurance coverage available to its tenant operating as a cannabis business.

Marijuana operations pose unique insurance issues that stem from the high usage of water (presenting potential issues of mold), the highly flammable nature of certain processing techniques, the increased need for security, and the federal illegality of the operation. Anecdotally, this author has been informed that coverages such as general liability, excess, property, and automobile insurance for cannabis businesses are limited because few insurance companies will accept the exposure. Policies typically are written through surplus lines carriers that are not admitted by a state’s insurance commission. In addition, premiums are high, and the general liability coverage typically is written on a claimsmade basis rather than the preferred occurrence-form basis, which creates added risk for a landlord and business owner. Some insurance issues to evaluate include: • Whether the state’s statutory or regulatory framework requires certain insurance coverage.

• The defined terms of the policy and how they compare with the

statutory definition—for example, what term does the policy use— “marijuana,” “cannabis”—and do the defined terms match or create a gap in coverage based on state law definitions?

• Policy exclusions—for example, does the policy exclude coverage for a violation of law or regulation?

• Will a cannabis manufacturer that uses high heat in its manufacturing process cause higher property insurance premiums, or a difficulty in securing a policy in the first instance?

• What security measures may be required to protect against theft?

If the business employs an armed guard, is there an exclusion for claims under a general liability policy involving a use of firearms?

• What liability may exist on the retail side arising from a “budtender’s” product recommendation?

• For commercial general liability insurance coverage, are there any specific policy exclusions such as civil claims based on the Racketeer Influenced and Corrupt Organizations Act, class action claims, or claims based on a failure to maintain a valid license within the particular state of operation?

• Should a landlord require that its tenant secure crop coverage if it is a cultivator?

There are some states that do offer specific policies for cannabis businesses, such as California, Colorado, and Nevada.

These policies do need to be reviewed carefully to understand fully the scope and quality of the coverage provided by the policies.

Conclusion The trend appears to favor the continued growth of the cannabis industry and its ultimate legalization at the federal level.

Pending that outcome, landlords and tenants need to think creatively about potential issues and appropriate protective covenants to ensure that their respective business risks are protected and rewarded. n

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January/February 2024 23

KEEPING CURRENT P R O B AT E CASES BENEFICIARY LIABILITY: Estate of deceased beneficiary not vicariously liable for the trustee’s malfeasance. The decedent’s lifetime trust was divided into “family” and “marital” shares on the decedent’s death, and eventually the decedent’s stepchild became the trustee.

The remainder beneficiaries were the decedent’s children. After the death of the decedent’s spouse, the parent of the trustee petitioned for an accounting.

The trial court found that the trustee had violated fiduciary duties by making unauthorized distributions from the trust mainly to the surviving spouse and that the surviving spouse’s estate was jointly and severally liable for the trustee’s actions. On appeal by the trustee and the surviving spouse’s estate, the Utah intermediate appellate court in Matter of A. Dean Harding Marital and Family Trust, 536 P.3d 38 (Utah Ct. App. 2023), affirmed all the findings with respect to the trustee except concerning one portion of the damage award, which was remanded for recalculation and reversed with regard to the liability of the estate because it was procedurally improper and also substantively incorrect. The trustee made improper distributions to the surviving spouse, but the authority to make distributions came from the trust terms, not from the surviving spouse, and there appeared to be no law making those who benefit from unlawful acts liable for those acts.

Nor did the trustee act as the beneficiary’s agent. The court noted that recovery might be had from the estate on a constructive trust theory, which should be considered on remand if the trial court 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, literature, and legislation.

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

concluded it was properly pleaded or tried by consent.

CHARITABLE GIFTS: Estate of donor and contingent beneficiary lack standing to object to modification of terms of gift. The decedent’s will gave one-half the residuary estate to Dartmouth College for the “upgrading and maintaining” of a golf course belonging to the donee with any excess funds given to the decedent’s foundation. In 2005, three years after the decedent’s death, the executor and the donee entered into a “Statement of Understanding” under which the donee agreed to use the gift to establish a quasi-endowment fund devoted to the upkeep and maintenance of the golf course. In 2020, the donee decided to permanently close the golf course and applied under the New Hampshire enactment of UPMIFA (N.H. Rev. Stat. § 292-B:6) to allow the fund to be used to support the donee’s varsity golf programs and related physical facilities. The estate was re-opened, and the appointed fiduciary and the foundation moved to intervene in the application.

The motion was denied, the application was granted, and on appeal the New Hampshire Supreme Court affirmed in In re Keeler Maintenance Fund, No. 20220145, 2023 WL 4497988 (N.H. July 13, 2023), declining to extend the law of special interest standing as it applies to claims against trustees of charitable trusts to disputes over outright

charitable gifts and holding that the common law of cy pres has been superseded by the provisions of UPMIFA. The court expressly declined to state whether a breach of contract claim against the donee would be viable.

DIVORCE: Ex-spouse’s heirs cannot take because of ex-spouse’s deemed death before the decedent. The Minnesota revocation on divorce statute, Minn.

Stat. § 524.2-804, revokes all devises to the ex-spouse and deems the ex-spouse to have died immediately before the dissolution of the marriage but does not address devises to relatives of the exspouse. In Matter of Estate of Tomczik, 992 N.W.2d 691 (Minn. 2023), the Minnesota Supreme Court held that a devise of one-half of the residue to “my wife’s heirs-at-law” does not pass to the parents of the testator’s living ex-spouse.

The court first held the testator intended to make a class gift based on a family relationship that does not exist at death and, second, that a statute revoking a devise to a former spouse indicates that the legislature also intended that dissolution of the marriage revoke devises to relatives of the former spouse.

ELECTIVE SHARE: Transfer of property is fraud on the surviving spouse’s elective share. Tenn. Code § 31-1-105 provides that for purposes of calculating a surviving spouse’s elective share, the “net estate” of the deceased spouse includes property transferred with the intent to defeat the surviving spouse’s elective share rights. In In re Estate of Quinn, No. M2022-00532-COA-R3-CV, 2023 WL 5013257 (Tenn. Ct. App. Aug. 7, 2023), the Tennessee intermediate appellate court held that the following circumstances taken together indicate that transfers of real property the decedent made three days before death fall under the statute: the decedent had filed for divorce at the time of the transfers; one of the transfers creating a life estate

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in the decedent’s home for the decedent’s former spouse, remainder to the decedent’s and former spouse’s children, was illusory because the decedent continued to reside in the home; and the timing of the transfers just days before the decedent’s death.

MARITAL PROPERTY: Increase in value of investments of non-marital property is not marital property. Spouse A received an advanced inheritance from Parent. Spouse A placed the cash in a brokerage account separate from the couple’s other investment accounts. The cash was invested in mutual funds that were held up to the time the couple filed for divorce. The trial court held that the appreciation of the mutual fund shares, which was substantial, was marital property because it resulted from the efforts of one or both of the spouses in selecting the investments. On appeal by Spouse A, the intermediate Florida appellate court in Naranjo v. Ochoa, 366 So. 3d 11 (Fla. Dist. Ct. App. 2023), reversed, holding that the shares grew in value by “passive appreciation” from the efforts of the fund managers, not from the spouses in selecting the funds.

SIGNATURE: The testator’s signature on self-proving affidavit is not a signature on the will. The decedent’s children offered for probate a purported will. The decedent did not sign the document on the signature line in the testimonium clause but did sign the self-proving affidavit attached to the purported will.

The witnesses signed both the attestation clause and the affidavit. The court denied probate on the ground that the testator did not sign the will as required

by Tenn. Code § 32-1-104(1)(A). The intermediate appellate affirmed in In re Estate of Washington, No. M2022-01326COA-R3-CV, 2023 WL 4886935 (Tenn.

Ct. App. Aug. 1, 2023), holding that the self-proving affidavit was not part of the will and that therefore a signature on the affidavit is not a signature on the will.

TANGIBLE PERSONAL PROPERTY: Gift of tangible personal property does not include cash.

The decedent’s will gave all tangible

personal property to the decedent’s spouse, who survived the decedent.

During the surviving spouse’s inspection of the decedent’s home, the decedent’s sister, who was the nominated executor, and the decedent’s niece found $21,000 in cash. The surviving spouse filed a claim against the estate for the cash, arguing that it was tangible personal property. The trial court entered an order finding that the cash was intangible personal property.

On appeal, the intermediate appellate court affirmed in In re Estate of Williams, No. E2022-01621-COA-R3-CV, 2023 WL 5274563 (Tenn. Ct. App. Aug. 16, 2023). The court found authority for holding cash money to be intangible personal property in case law from other jurisdictions, as well as definitions in Tenn. Code § 67-5-501(5) defining property for purposes of property taxation.

TRUSTEES: Duty to account requires only keeping of records. In Schwalm v.

Schwalm, 213 N.E.3d 618 (Mass. App. Ct. 2023), the Massachusetts intermediate appellate court has held that remainder beneficiaries of a trust who are not “qualified beneficiaries” under the Massachusetts version of the Uniform Trust Code have no right to an accounting under the common law because the common law duty to account only requires a trustee to keep books and records and does not require the trustee to provide that information to non-qualified beneficiaries.

TAX CASES, RULINGS, AND REGULATIONS TRUST: Trusts must have a purpose other than tax avoidance. The petitioner did not file tax returns for at least 14 years. The petitioner had a warehouse and mini-storage business and created an array of entities that purported to hold assets that he used in business and financial transactions. The IRS investigated the petitioner’s lack of filing compliance and found deficiencies attributable to unreported rental income, gain from the sale of real property, taxable Social Security benefits, and other

income. The petitioner denied being a beneficiary of the trusts but enjoyed the assets and their income. No documents such as trust agreements, declarations of trust, or tax returns existed that substantiated the legal existence of the entities or confirmed the identities of their settlors, trustees, or beneficiaries.

The petitioner denied being the trustee but did list his name on registrations with the Oregon Secretary of State and a bank. The Tax Court in Saccato v. Comm’r, T.C. Memo 2023-96 (2023), held that the trusts did not exist, and even if they did, they would be shams; the sole purpose of the entities was to obscure the individual’s ownership of the assets they supposedly held. The petitioner always exercised total control over the assets and their income.

LITERATURE ATTORNEYS’ FEES: In Attorneys’ Fees – Kumble v. Voccola, 253 A.3d 1248 (R.I 2021), 27 Roger Williams U.L. Rev. 580 (2022), Andrew Arayamen analyzes this recent Rhode Island Supreme Court decision, which sets a precedent for predictability in assessing attorneys’ fees in estate planning and affirms a trustees’ right to reasonable compensation.

CALIFORNIA—REVOCABLE TRUSTS: In The Rise of the Revocable Trust in California, 29 Tr. & Est. Q. 9 (2023), Anne Rudolph and Ralph Hughes examine California’s history of failed attempts to reform the state’s probate system and the subsequent rising rates of revocable trusts to avoid the “perceived delay, publicity, and expense of California’s formal probate system.”

COPYRIGHT: In A Portrait of the Artist’s Heirs in Mediation: ADR Techniques to Prevent and Resolve Disputes Following an Author’s Death, 24 Cardozo J. Conflict Resol. 629 (2023), Nicholas Beudert explores how the current Copyright Act guarantees protection for70 years after an author’s death, which often benefits heirs more than the original author and can hinder scholarship use of that material. Alternative dispute resolution methods are a cost-effective way to

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resolve these conflicts, potentially allowing authors to compel their heirs to engage in mediation.

CORPORATE TRUSTEE FEES: In Busting the Myth About Corporate Trustee Fees, 111 Ill. B.J. 34 (2023), Jay Harker explores the misconception that corporate trustees are excessively expensive, leading many clients to prefer individual trustees. Harker argues that some situations demand the consideration of a corporate trustee, and estate planning clients should consider their specific circumstances rather than solely fixating on potential cost savings.

CORPORATIONS: In Death of a Corporation: How a Seemingly Innocuous Probate Provision Can Fundamentally Undermine the Corporate Form, 14 William & Mary Bus. L. Rev. 413 (2023), Kenya Smith examines the challenges that arise from interpreting a probate provision allowing estate representatives to “continue any business” of deceased shareholders, which can potentially conflict with a director’s ability to manage corporate affairs. The lack of clarity in coordinating probate and corporate laws poses many risks, especially to small businesses. Smith suggests certain remedies, including changes to statutory language to prioritize a respective state’s corporate law over probate provisions.

CRIMES AGAINST PROBATE: In Crimes Against Probate, 75 Fla. L. Rev. 357 (2023), Kevin Bennardo and Mark Glover explore how policymakers have turned to civil and criminal liabilities for misconduct like the forgery of wills.

But there are many doctrinal shortcomings with this plan. Instead, Bennardo and Glover suggest a new way of looking at these issues as evidentiary misconduct affecting the functioning of probate courts. They propose a new crime called “Intentional or Willful Interference with Probate” to better address misconduct within the unique context of wills.

CROSS-BORDER ESTATE PLANNING: In From Investment Vehicles to Treaties—What Foreign Investors Need to Know About Cross-Border Estate Planning,

34 J. Int’l Tax’n 35 (2023), Anthony Diosdi explores the challenges many foreign investors face navigating the US estate and gift tax system, which offers lower exemptions for non-US residents. Diosdi provides a comprehensive guide highlighting the differences in tax rates and exemptions for US citizens, residents, and foreign investors while emphasizing the importance of understanding domicile status and international tax planning opportunities.

ELDER LAW ETHICS: In Staying Ethical in Elder Law, 46 Wyo. Law. 12 (2023) Jenna Jordan emphasizes the importance of ethical considerations in the often complex and rewarding practice of elder law.

ESTATE TAX DEFERRAL: In The Exploration of Estate Tax Deferral and Its Application to Real Estate Holdings, 4 Corp. & Bus. L. J. 181 (2023), Robert Dyess explores the significant tax burden and liquidity issues for executors dealing with very large estates. He highlights 26 U.S.C. § 6166, which allows executors to defer payment of estate tax related to closely held trade or business interests.

This provision does not mention real estate interests, but the IRS has provided guidance on when real estate interests qualify. Although there may be some restrictions related to real estate deferral, Dyess urges eligible taxpayers to consider taking advantage of the benefit.

GAMBLING AND PROBATE LAW: In Roll The Bones: The Intersection of Gambling Law and Probate Law, 36 Quinnipiac Prob. L.J. 367 (2023), Robert Jarvis offers valuable insight for probate lawyers faced with gambling-related issues like the presence of gambling debts upon the decedent’s death.

GRANTOR TRUST ASSETS AND SECTION 1014: In Grantor Trust Assets and Section 1014: New IRS Ruling Doesn’t Solve the Problem, 139 J. Tax’n 16 (2023), Mitchell Gans and Jonathan Blattmachr argue that the recent IRS Rev. Rul. 2023-2 is not a comprehensive solution to address concerns of basis adjustment for assets remaining in the trust at death because it still preserves the repurchase

strategy. To end this strategy, they propose removing the “deemed ownership” principle in Rev. Rul. 85-13 and Example 5.

GRANTOR TRUSTS: In Resolving Unfairness in a Fair Way: How the Grantor Trust Rules Should Be Reformed, 48 B.Y.U. L. Rev. 2311 (2023), Aaron Anderson explains how wealthy taxpayers often use grantor trusts to capitalize on tax advantages from the differences between income and estate tax regulations, enabling them to avoid applicable income tax brackets and minimize their estate’s taxable property. Anderson provides a comprehensive background on grantor trusts, advocates for harmonizing the estate and income tax systems to reform the grantor trust rules, and suggests grandfathering certain provisions to safeguard the taxpayers who relied on the current rules.

GUN TRUSTS: In Estate Planning for Gun Owners: NFA Gun Trusts, 50 Est. Plan. 16 (2023), Ryan Holmes and Thomas Fabbri delve into how gun trusts can provide efficient means of firearm management, allowing authorized individuals to have legal access to firearms in compliance with federal statutes and regulations.

INCARCERATED BENEFICIARY: In her Commentary, Collateral Consequences of an Incarcerated Beneficiary: Preserving Testamentary Intent and Protecting a Testator’s Estate from Falling Victim to a Beneficiary’s Unreasonable Criminal Justice Debt, 52 U. Balt. L. Rev. 147 (2022), Torra Hausmann discusses essential planning considerations for testators with incarcerated beneficiaries, like inmate property rights and the risks of criminal justice debt, to protect testamentary intent. Hausmann highlights the use of a discretionary trust to protect an incarcerated beneficiary’s inheritance but also argues that it may not be the right fit for every client. No solution is perfect, but it is important to understand the options for testators with incarcerated beneficiaries to best tailor their estate plans.

Published in Probate & Property, Volume 38, No 1 © 2024 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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MISSISSIPPI—WILL FORMALITIES: In Matter of Will of Ratcliff and the Not-So-Harmless Error: A Call to Change Mississippi’s Approach to Will Formalities, 41 Miss C. L. Rev. 146 (2023), Kelsi Baldwin advocates for Mississippi to adopt the Uniform Probate Code’s harmless error rule to replace the current state of uncertainty with a more consistent and clear standard for will formalities.

NORTH CAROLINA—POSTMORTEM RIGHT TO PUBLICITY: In You Can Take It with You: An Argument for Establishing a North Carolina Postmortem Right of Publicity, 24 N.C. J.L & Tech. 1 (2023), Weston Barker explores how artificial intelligence’s ability to create lifelike depictions of the deceased can cause legal and ethical dilemmas for North Carolina residents. Barker argues that North Carolina should adopt legislation protecting a postmortem right of publicity similar to that enacted in New York.

REMOTE SIGNING AND WITNESSING: In Putting Trust in Technology: A Pandemic’s Effects on Remote Estate Planning, 40 Cardozo Arts & Ent. L.J. 825, Amy Weiss explores how the COVID-19 pandemic accelerated the adoption of remote witnessing and notarization of legal documents. Though federal legislation is still pending to authorize remote notarization, it will be left to the state’s discretion to allow remote witnessing for wills and estate planning documents. Weiss encourages legal professionals to stay informed about technology and privacy standards when helping clients navigate these new remote processes.

RETIREMENT PLANS: Kurt Winiecki “offers a documents checklist that helps attorneys determine whether a retirement plan sponsor is putting themselves at risk by violating ERISA’s fiduciary requirements or failing to document prudent plan decisions” in A Checklist for Retirement Plan Sponsors, Ill. B.J., July 2023, at 38.

RHODE ISLAND—ELECTRONIC WILLS: In The Future of Electronic Wills in Rhode Island after COVID-19, 27

Roger Williams U. L. Rev. 423 (2022), Crystal Collins discusses how the COVID19 pandemic emphasized the need for Rhode Island to move away from strict compliance with the Wills Act to embracing electronic wills. She advocates for the adoption of electronic wills so that all Rhode Islanders may exercise their testamentary freedom.

RULE AGAINST PERPETUITIES: In Perpetuities in an Unequal Age, 117 Nw. U. L. Rev. 1477 (2023), Jack Whiteley discusses how the elimination of the Rule Against Perpetuities in state legislatures has allowed the creation of “dynasty trusts,” enabling wealthy individuals to control wealth for generations. Whiteley argues that the complexity of inheritance law, like the Rule Against Perpetuities, played a significant role in its demise.

This complexity can inadvertently enable dynastic wealth preservation. Thus, it is important for policymakers to strongly consider the effects of rule complexity when writing future inheritance law and wealth distribution reform proposals.

SECURE ACT PLANNING: In SECURE Act Planning Opportunities When Beneficiaries Are in Dissimilar Tax Brackets, 50 Est. Plan. 22 (2023), James Blase discusses planning opportunities under the SECURE Act for beneficiaries in different tax brackets, suggesting strategies like directing IRA distributions to a lowertax bracket beneficiary to minimize the aggregate federal and state income tax liability.

TRUST CREATION THROUGH DELEGATION: In Creating a Trust Through Delegation, 36 Quinnipiac Prob. L.J. 411 (2023), Raymond O’Brien argues for a modification in legislation like the Uniform Power of Attorney Act (UPOAA) that requires an explicit grant of authority for agents to create, amend, revoke, or terminate trusts. Although the UPOAA was designed to protect vulnerable adults from financial exploitation, O’Brien argues that requiring express authorization violates the principal’s best interest. Considering the accelerated use of POAs, inter vivos trusts, and the many protections against financial

exploitation, O’Brien advocates that agents should be able to create, amend, and terminate trusts in accordance with their fiduciary obligation.

VIRTUAL CURRENCY TAXATION: In Uncertainty in Virtual Currency Taxation, 86 Alb. L. Rev. 445, (2023), Neha Goel explores how virtual currency has surged in popularity in the United States and worldwide. The IRS introduced initial guidance on virtual currency in 2014, but the guidance has not evolved, leaving taxpayers with many unanswered questions about emerging virtual currencies as well as non-fungible tokens. Goel explores the inadequate guidance for popular virtual currencies, delves into foreign reporting requirements, and proposes solutions to some uncertainties that taxpayers who use emerging virtual currencies face.

LEGISLATION CALIFORNIA restricts certain healthcare agents from making listed decisions such as abortion, sterilization, and convulsive treatment. 2023 Cal. Legis. Serv.

Ch. 171.

CALIFORNIA updates provisions regarding Transfer on Death Deeds. 2023 Cal. Legis. Serv. Ch. 62.

ILLINOIS allows convicted murderers and other felons to serve as executors under specified circumstances. 2023 Ill. Legis. Serv. P.A. 103-280.

ILLINOIS is the first state to enact the Uniform Electronic Estate Planning Documents Act. 2023 Ill. Legis. Serv. P.A. 103-301.

MICHIGAN updates provisions governing the Michigan Statutory Will. 2023 Mich. Legis. Serv. P.A. 72.

NORTH CAROLINA updates the surviving spouse’s elective share. 2023 N.C. Laws S.L. 2023-120.

OREGON modifies the estate tax treatment of certain natural resource property. 2023 Ore. Laws Ch. 286. n

Published in Probate & Property, Volume 38, No 1 © 2024 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.

January/February 2024 27

ADVANCE DIRECTIVES Drafting and Implementation

By Allison R. Clapp and Ashley F. Lanzel

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n advance directive is a legal document that enables an adult client to (1) name one or more individuals as the client’s agent(s) or attorney(s)-in-fact to make health care decisions on the client’s behalf and (2) specify the client’s wishes with respect to his health care in certain circumstances.

Advance directives present a unique set of challenges for a lawyer who is experienced in drafting legal documents and advising about legal matters but who may have little knowledge or experience regarding medical issues.

Because of the dual nature of this document as both a legal document and a medical document, the authors have joined together to combine their respective legal and medical knowledge to provide practical advice regarding how best to address clients’ interests in this important arena. This article will provide specific drafting tips for lawyers as well as recommended steps the client should take after signing an advance directive.

Allison R. Clapp is an associate at Stewart, Plant & Blumenthal, LLC, in Baltimore, Maryland, and is a member of the ABA Real Property, Trust and Estate Law Section, Taxation Section, and Young Lawyers Division. Ashley F. Lanzel is a palliative care specialist at Children’s National Hospital, where she also serves as the associate program director of the Hospice and Palliative Medicine Fellowship.

Include Contact Information for the Named Agents Determining who should serve as the client’s agent is arguably the most important part of the advance directive.

Be sure that the advance directive contains sufficient information so that the agent can be located when the client is incapacitated and unable to provide such information. If possible, include multiple avenues for contacting the agent (such as a cell phone number, home phone number, home address) to ensure that physicians are able to communicate with the agent when the time comes.

Sometimes, Less Is More As long as the client trusts her agent, be careful to draft in a way that gives the agent discretion to make the best decision at the relevant time. A document that is overly specific about how to act in certain circumstances may tie the agent’s hands in making the decision that is truly most consistent with the client’s wishes. Most forms provide the option to include language specifying the client’s health care preferences in certain circumstances. In addition to such language, consider including language giving the agent authority to override those specifications at the time of decision if the agent believes that doing so would be most consistent with the principal’s best interests.

Sample language: I recognize that I cannot foresee everything that might

happen or all options that may be available when I am incapable of making medical decisions for myself. My preferences stated in this [Section reference] are meant to guide my agent and my health care providers in making decisions on my behalf. It is my intent that my agent and my health care providers follow my stated preferences if my agent and my health care providers believe that doing so is in my best interest, but my agent shall have the discretion to make the decisions that my agent believes to be in my best interest at the relevant time regardless of what is otherwise stated in this [Section reference].

If the Client Is Strongly in Favor of or Opposed to a Particular Course of Treatment, Spell That Out Specifically The client may have strong convictions or opinions with respect to certain treatment options, and these preferences should be considered when drafting the advance directive. For instance, if your client is a Jehovah’s Witness and has a religious objection to receiving a blood transfusion, consider specifying that prohibition in the document. If the client believes there is some risk that her agent will have a different view of the client’s best interest, consider including language mandating that the agent specifically follow the written wishes.

Sample language: It is my desire that my agent and my health care providers follow my preferences stated in this [Section reference] exactly as written, even if

Published in Probate & Property, Volume 38, No 1 © 2024 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

my agent and/or my health care provider believes that some alternative is better.

Advance Directives Are Important Even if the Client Names Close Family Members as Decisionmakers If no advance directive has been signed, state law generally will fill the gap by providing an order of priority for surrogate decision-makers on behalf of the incapacitated person (e.g., the person’s guardian, if any; followed by close family members, etc.). These individuals may have, however, or may be perceived to have, less authority to make decisions than a named agent and may be limited in the range of their discretion. In contrast, a properly drafted advance directive can enable the specified health care agent to have the same broad right to consent to and refuse treatment as the principal would.

Further, an advance directive allows the client to specify her preferred

decision-maker(s), even if such decision-makers are different from the statutory default. For instance, a client who is part of a blended family may wish to name her adult children ahead of or together with her spouse. A client who is unmarried but part of a longterm relationship may wish to name her partner to participate in her health care decisions. Even if the client wishes to name the same individual as would have legal priority under the statute, taking the step to name that individual in the advance directive can give more weight to the agent’s authority by proving that this truly corresponds with the principal’s wishes, especially if there is disagreement among loved ones as to the proper treatment.

If Multiple Decision-makers Are Named, Specify How or in What Order They May Act Make sure the document is clear about whether the named agents act

successively or concurrently. If multiple agents are appointed to act concurrently, be sure to specify whether they must act unanimously or whether either may act alone. If the client has an individual whom she wishes to be part of the conversation but not actually to have legal decision-making authority, consider expressing a nonbinding preference that such individual be consulted by the agent. If there is someone whom the client wishes to play no role in her health care decisions, consider adding a paragraph stating that such individual is disqualified from participating in health care decisions on behalf of the principal.

Consider the Effective Date and Durability of the Advance Directive For the sake of administrative convenience, it may be simplest to make the advance directive effective immediately, subject to the ability of the client

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to make her own health care decisions if she has capacity. Alternatively, the client may wish for the document to be “springing” with respect to the health care power of attorney, which would require the additional step of a certification by physicians of the client’s incapacity before the named agent(s) would have authority to access confidential health care information or make health care decisions on behalf of the client.

Because one of the goals of an Advance Directive is to allow the named agent(s) to make health care decisions if the client is incapacitated, be sure to state that the document is durable, i.e., that it is still legally binding even following the client’s incapacity.

Organ Donation It is not strictly necessary to specify a preference regarding organ donation in a client’s advance directive, but it is a good idea to do so. The client may have the opportunity in his state to specify his wishes via a state organ donation registry or driver’s license. Further, even if the individual’s driver’s license and advance directive are silent, family members may be able to consent to organ donation on the patient’s behalf when relevant. But making a statement as to the client’s wishes in the advance directive can provide an added level of clarity and put his wishes beyond doubt. The Advance Directive also allows for a greater degree of flexibility to specify the range of purposes for which the client wishes the organs to be used, which organs he would like to donate, etc. Further, if the client has decided against organ donation, it may be advisable to specify that wish in his advance directive to ensure that such preference is complied with.

Pregnancy For women of childbearing age, consider including a statement as to whether the client’s expressed preferences regarding life-sustaining procedures still apply if she is pregnant at the time. Many clients who otherwise would not wish to receive life-sustaining interventions may wish to be kept

Even if the individual’s driver’s license and advance directive are silent, family members may be able to consent to organ donation on the patient’s behalf when relevant. alive if pregnant with a reasonable chance of the baby being born healthy.

Although thankfully rare, when these situations arise, they can result in difficult decisions for the hospital’s ethics committee balancing the interests of the unborn baby with the expressed wishes of the mother. These difficulties can be mitigated or avoided by a clear statement that the individual wishes to be kept alive for the sake of finishing out the pregnancy. Note that state abortion laws may be interpreted as placing a limitation on the degree of discretion for the mother in some situations. In a situation where abortion would be illegal, physicians may determine that they are not permitted to terminate life support if that would result in the termination of the life of the unborn child.

Sample language: Notwithstanding my previously stated preferences, if I am pregnant, then I direct that all life-sustaining treatment be continued during my pregnancy where there is reasonable hope of my child being born healthy.

Consider Whether Other Documents Should Be Signed in Addition to the Advance Directive Advance directives frequently contain an authorization to disclose protected medical information to the agents named in the document. But the client may wish for this authorization to be broader. A client with a springing health care power of attorney under the

advance directive may wish for certain individuals to have immediate access to medical records. In light of these realities, consider having your client sign a Health Insurance Portability and Accountability Act authorization consenting to the disclosure of protected medical information to trusted individuals such as a spouse, partner, parents, or adult children.

Additionally, a client with a terminal condition may wish to sign a Physician Orders for Scope of Treatment, Physician Orders for Life Sustaining Treatment, Medical Orders for Life Sustaining Treatment, or, if applicable, a health care order about resuscitation, such as Do Not Intubate or Do Not Resuscitate. These forms must be completed with the client’s physician (or, in some states, nurse practitioner or physician assistant), not the client’s lawyer, but you may wish to make the client aware of such forms and recommend speaking with a physician about any additional forms that may be recommended.

Practical Steps Client Should Take after Signing 1. Provide signed advance directive to health care providers. Encourage your client to provide a copy of the signed advance directive to her primary care physician and any other doctors she sees regularly. This is the best way to ensure that her physician is aware of the document and has ready access, and may also serve as a starting point for a conversation with her primary care provider about other relevant forms. The client (or her physician) may be able to upload the document to an online chart so that it is more easily shared among all the client’s health care providers.

2. Have a conversation with the named health care agent(s). Even more important than laying out the client’s wishes in the advance directive is ensuring that the client has discussions with her agent(s) to explain what the client’s wishes would be in various

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circumstances. These conversations can provide more detail than is possible to write into a document and can provide the agent with peace of mind that she is following the client’s specific wishes should the agent ultimately need to make medical decisions on behalf of the client.

The client should be sure that the agents know that they are named as decision-makers in the advance directive and know where to locate a copy of the document.

3. Consider having a conversation with other family members. Especially if the client has made a decision that may be unexpected about who to name as the client’s health care agent (e.g., bypassing a close family member) or has a preference regarding various medical interventions that other family members may not share, it can be helpful to break the news ahead of time so that family members are prepared at the time that the advance directive is utilized.

This procedure may help to avoid

contention and familial strife when medical decisions are being made in the future and can help to ensure that the client’s wishes are followed.

4. Revisit the advance directive regularly in order to confirm that it still reflects current wishes. Although an advance directive does not expire, agents and medical professionals may be less certain that a very old document still reflects the client’s current wishes, especially if there have been major life changes in the interim. An old document will not be disregarded merely for being old. In the case of passage of time or changed life circumstances (e.g., a document that names an ex-spouse), however, the issue may have to go to the hospital’s ethics committee to determine whether the document reflects the patient’s current wishes.

5. Revoke an outdated advance directive and inform anyone aware of the prior document that it has been revoked or superseded. An advance

directive generally may be revoked by a written document (including a revocation contained in a superseding advance directive). If the advance directive is revoked, make sure that the client informs her agents, physicians, or others who previously may have been made aware of the old document so that there is no confusion about whether the document continues to be valid.

Conclusion An advance directive is an important component of a client’s estate plan, and it often does not get the attention that it deserves. Indeed, many clients may care more deeply about the health care decisions made on their behalf during their lifetime than about the disposition of their property after their death.

Estate planning attorneys would do well to educate themselves about the issues surrounding advance directives and to initiate careful and thorough conversations with clients about these life-and-death issues. n

Published in Probate & Property, Volume 38, No 1 © 2024 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.

January/February 2024 31

An Introduction to Operating Expenses in Commercial Leases

By Scott W. Fielding and Travis A. Beaton

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t their most fundamental level, lease agreements are often described as contracts or conveyances by which a landlord allows premises to be used and occupied, in exchange for a rental payment. Such general descriptions—although entirely accurate—oversimplify the complexity of leasing arrangements by suggesting that base rent alone is adequate consideration for the tenant’s use of the premises. In reality, base rent might be more precisely characterized as the base or floor monetary amount that the landlord will agree to receive in return for a tenant’s mere possession of the premises.

Tenants, however, require more than just bare (ground) space or floor area and usually demand premises that are operationally equipped for tenant’s intended use, legally compliant, properly protected and insured against damages (both physical and monetary), readily serviceable, potentially profitable (if applicable), and

Scott W. Fielding is a partner at the law firm of Sherrard Roe Voigt & Harbison, PLC, in Nashville, Tennessee. Travis A. Beaton is a partner at Sher Garner Cahill Richter Klein & Hilbert, LLC, in New Orleans, Louisiana, and serves as chair of the ABA RPTE leasing group’s Retail Leasing Committee and as an associate articles editor of Probate & Property.

easily accessible, among other qualities.

Although functionality is an essential component of any premises, it is usually secured by the payment of operating expenses (sometimes referred to in this article as Opex charges) that are calculated in accordance with their own lease provisions, rather than those addressing base rent. This structure is typical of the vast majority of commercial leases primarily because such expenses (most commonly including costs of insurance, taxes, utilities, and maintenance broadly defined) are difficult to estimate accurately over a lease term, rendering their incorporation into base rent (or an escalation thereof) unfeasible and risky. Still, tenants require that their premises be connected to working utilities, insured against casualties and current on property taxes, and adequately maintained for their operations; and they are usually amenable to paying their share of such expenses to their landlords to ensure the same. Consequently, leases often include provisions to pass along such expenses to tenants by imposing separately calculable Opex charges.

These provisions are important, and they are often an insufficiently-reviewed part of a lease negotiation.

This article will introduce the fundamental concepts governing the inclusion of Opex charges, examine their typical allocations and structure, distinguish among categories of Opex charges that are customarily included or excluded in rental

payments, and offer advice and practice tips for tenants (and their counsel) to consider in unique scenarios.

Operating Expenses—Preliminary Concepts Almost all types of retail, office, or general commercial real estate leases include various forms of additional rent that are payable by tenants in addition to base rent, fixed rent, psf rent, or annual minimum rent (for purposes of this article, Fixed Rent). Additional rent almost always includes Opex charges, which at a minimum include those imposed in connection with (i) real estate taxes, (ii) insurance expenses, and (iii) maintenance costs (as used in this article, the primary Opex categories). Utility-related charges also sometimes constitute a quasi-primary fourth category, but many times are incorporated into maintenance costs.

The manner by and extent to which these Opex charges are imposed upon (or passed-through to) tenants are governed by the respective lease structure (as discussed below), but among them, maintenance is the category that is least consistently defined, calculated, and collected in leases. For example, maintenance costs could include costs for utilities, janitorial services, separate HVAC, snow removal, security, landscaping, promotional or advertising costs, fire protection, compliance with sustainability standards, and trash removal, among other items.

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Importance and Purpose of Operating Expenses Landlords impose Opex charges against tenants for costs incurred in the operation of their premises by either (1) allocating such costs on a proportional basis, calculated according to each premises’ pro-rata share of an aggregate expenditure attributable to a larger building, campus, or center (a site) of which the tenants’ premises form a part, or (2) directly charging tenants for costs and services that are not already accounted for in the fixed rent rate, to the extent they are attributable to their respective premises, exclusively.

Examples of Opex charges that typically are calculated on a proportional basis include landlords’ costs in providing utilities to a larger multitenant site in which individual premises are not separately or sub-metered, as well as the expenses landlords incur in maintaining common areas of the same.

Under these circumstances, it is inefficient, difficult, or even impossible to determine the exact amount of Opex

charge for which each tenant should be responsible. So, landlords typically apportion the costs to tenants based on the proportion that the square footage or floor area of their respective premises X bears to the total square footage of the larger site Y; such proportion X/Y is then assigned to each tenant as its respective pro-rata share. This method of charging utilities based on pro-rata share of the occupied square footage is necessary because installing separate or sub-meters to identify the exact utility usage in each premise may be cumbersome.

Similarly, Opex charges associated with landlords’ maintenance of any common areas in multitenant sites are also usually calculated on a pro-rata basis based on square footage occupied. Because all tenants and their customers, guests, contractors, etc. enjoy joint use of such sites’ common hallways, walkways, or accessways; elevator bays and escalator banks; lobbies or food courts; as well as parking garages or lots, a precise allocation of

costs for use of the same is not possible.

The same is true for the other two primary Opex categories, landlords’ costs incurred in insuring a larger site and paying real estate taxes on the same.

Opex charges that are definitively attributable to only the premises, and no other premises or common areas—are the truest form of pass-through expenses, and are perhaps more typical of office leases (where premises are more often separately metered, especially if they encompass entire floors); leases of free-standing buildings constructed and owned by the tenant (such buildings may be directly insured by the tenant-owner); or leases covering the entirety of a separately assessed tax parcel (as a separate assessment allows the tenant to pay real estate taxes directly to the local taxing authority). In these scenarios, the Opex charges are easily ascertained because no other premises or tenants are benefitting from the services for which the tenant is being charged. Sometimes, tenants may be able to procure and pay for these primary Opex categories directly

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without their landlords’ involvement by paying utility providers, insurers, or taxing authorities directly. Other times, however, it may be more efficient for landlords to procure such services and pay such costs up-front, and instead require reimbursement from tenants for the same, as a form of additional rent.

Thus, Opex charges can constitute additional rent under a lease in a variety of ways: Some tenants may have all services and primary Opex categories procured by landlords, for which they reimburse their applicable Opex charges on a square-footage-based, pro-rata basis; other tenants may procure such services themselves and pay the associated Opex charges directly to the applicable provider or entity. Still other tenants may rely on landlords to secure or obtain services, but will instead reimburse landlords for the associated Opex charges on a direct basis, to the extent such calculation is feasible.

The majority of tenants, however, rely on a combination of the above methods and scenarios.

Operating Expense Structures— Types of Leases Commercial leases are classified routinely as (i) gross leases, (ii) net leases, or (iii) modified gross leases. Most in the real estate industry view these classifications as distinguishing which party is responsible for performing the obligations that result in the applicable Opex charges. Normally, (i) under true gross leases, landlords are 100 percent responsible; (ii) under true net leases, tenants are 100 percent responsible; while (iii) modified leases occupy a middle ground in the spectrum, under which such responsibility is split between the parties. In practice, regardless of their names, most lease agreements fall into this third modified lease category, as true or absolute gross or net leases are somewhat uncommon. Because practitioners vary in the use of these titles in their lease documents, it is important to avoid placing undue emphasis on a lease’s name, as that name may not accurately represent the agreement’s structure in the context of Opex charges (or otherwise).

A landlord under a true gross lease (sometimes called a full-service lease), for example, is responsible,theoretically, for

A tenant under a true or absolute net lease is responsible for the performance of all operational services and payment of all associated Opex charges.

the performance of all operational obligations related to the premises, and the tenant’s only contribution to the Opex charges arising out of the same must be incorporated into the fixed rent rate.

Landlords under such full-service leases risk financial losses if their tenants consume more utilities or require more maintenance or service than was initially anticipated and factored into the fixed rent. Therefore, these types of leases have become less common in recent years. Still, there are certain types of office leases as well as single-purpose leases—such as those for billboards, other signage, or cell towers (or a residential lease)—that may be written as a full-service lease.

On the other end of the spectrum, a tenant under a true or absolute net lease (sometimes called a bondable or bankable lease) is responsible for the performance of all operational services and payment of all associated Opex charges. These payments and charges may include those connected with the exterior and roof of the premises, as well as costs associated with repairing or replacing damaged or destroyed premises, all of which are assumed to be the landlord’s responsibility. Such absolute net or bondable leases therefore are likely attractive only to tenants with significant and flexible cash flows who are sufficiently solvent to risk such financial liabilities. This may be

attractive in exchange for an extremely long-term lease of premises over which the tenant has considerable control, or that they can pledge as collateral for a loan. Complicating matters further, many use the term “net” to describe any leasing arrangement in which Opex charges— those associated with the primary Opex categories—are passed through to the tenant via direct payment, reimbursement, or otherwise.

Accordingly, because each absolute end of the leasing spectrum suits only those landlords and tenants who meet rather limited and specific criteria, most leases fall somewhere in the middle of this range.

These mid-range leases are best described as modified net or gross leases—again, the title of the lease is not a determinative or accurate description—that share both net and gross lease characteristics. In practice, most commercial leases bifurcate the responsibility for the (i) provision of the services related to the primary Opex categories and (ii) costs for such services via Opex charges. These bifurcated leases are one of the clearest examples of a hybrid arrangement. Theoretically, such leases are both (a) gross, meaning landlords are obligated to provide all operational services, and (b) net, meaning tenants are responsible for the payment of the Opex charges associated with those services.

This basic structure (in which landlords procure or obtain the primary Opex categories, and the costs are passed through to the tenant via Opex charges) is perhaps most universal, as it is typically impractical (or sometimes even impossible) for either single party to both provide and pay for every single type and aspect of operational service. Thus, the vast majority of leases are of a modified structure, generally obligating landlords to provide all or some of the primary Opex categories and other services, while requiring tenants to contribute or reimburse landlords for such provision via their payment of Opex charges. The base-year lease discussed below is an example of a modified gross lease.

Tenant’s Pro-Rata Share As noted above, many leases require tenants to contribute (almost always via reimbursement) to landlords’ Opex

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charges incurred in the operation of the premises and the larger site within which it is situated. Other than direct charges that can be verifiably associated with the premises exclusively (e.g., separately metered utilities or real estate taxes imposed against a separately assessed tax parcel), most such Opex charges are calculated according to the square-footage-based, pro-rata basis introduced above. The determination of the tenant’s pro-rata share is not always straightforward.

Standards for measurement of leased premises, generally fall into three categories: (1) aggregate or gross square footage (GSF), (2) usable square footage (USF), and (3) rentable square footage (RSF) (again, keep in mind that these are not standard terms that all leases or practitioners rely upon). GSF is the most basic measurement of any premises or larger site and typically includes everything from the exterior walls inward. USF, by contrast, includes only those portions of a given premises that the tenant can physically use per the terms of its lease.

The majority of commercial leases (except those negotiated by tenants with extreme leverage) will identify the size of a premises as equal to its GSF rather than its USF. Tenants should be aware that if they are paying fixed rent on a per-square-foot (psf) basis for their premises, then even the square footage (sf) they cannot use will be included in their fixed rent rate.

Unusable areas might include elements like elevator shafts, emergency stairwells, mechanical and electrical closets, or janitorial corridors that are situated within the walls of a tenant’s premises. These may be included in its sf calculation for purposes of both fixed rent and Opex charges (to the extent the latter is payable on a pro-rata basis), even though they are not usable space. Some tenants may succeed in requiring the landlord to use their USF rather than GSF for these calculations, but likely only where the unusable space comprises a large portion of the premises or detracts in a material way from tenant’s use. Relied upon mainly in multitenant office building sites, RSF generally includes USF plus all areas that may be usable by a given tenant not exclusively, but rather jointly with (some or all) other

tenants. In such office space sites, premises are often configured differently, with some tenants leasing entire (or multiple) floors and others sharing floors with one or more additional tenants. These differing configurations render unworkable the more straightforward pro-rata share calculation used in retail leases, as it is less discernible which common areas or other unusable spaces benefit which tenants. Instead of attempting painstakingly to examine and measure each common area and unusable space, office landlords instead (i) calculate the aggregate sf of unusable or common areas of the site and then (ii) impose Opex charges on their tenants by using each tenant’s USF to determine their pro-rata share (in terms of sf) of the aggregate common areas, which is then added to each tenants’ USF—the resulting sf being the RSF. Allocating Responsibility for Operating Expenses As with the other issues described in this article, landlords and tenants rarely agree on the extent to which each of the primary Opex categories are included as additional rent. This section will discuss some of the issues with respect to the primary Opex categories.

Taxes. At the least contentious end of the spectrum, taxes and insurance are two of the primary Opex categories on which landlords and tenants can reach relatively quick agreement. The responsibility for the payment of real estate taxes, for example, tends to be straightforward—for the most part, landlords will be responsible and then pass through to tenants a pro rata share of the real estate taxes. But in the case of some specific types of leases discussed above, tenants may pay taxes directly if they are leasing a separately assessed tax parcel. Disputed aspects of tax obligations arise with landlords’ attempts to require their tenants to pay portions of taxes other than typical real estate or ad valorem taxes. Some disputes involve penalty-like assessments that authorities may impose upon a tenant, landlord, premises, or site because of a failure of the same to comply with green or sustainable policies or regulations imposed by the local jurisdiction with respect to recycling or trash collection.

Other disputes include referencing carbon taxes or other levies imposed on sites that have not sufficiently complied with similar standards to obtain a green certification, as are taxes designed to disincentivize individual automobile and parking use in favor of mass transit— again, mainly in certain geographic areas or states in the country, though most agree that these concepts will become more prevalent in leases nationwide. Relatively new concepts like these taxes have not yet settled comfortably into being the responsibility of either landlord or tenant.

Furthermore, because the breadth of definition of real estate taxes in a lease, the tenant should clarify—and the landlord will often agree—that real estate taxes do not include federal, state, and local income taxes; franchise and excise taxes; conveyance taxes; inheritance and death taxes; taxes on rent; and any penalties or interest due because of the late payment of taxes by the landlord. The tenant also should seek the benefit of any related tax refunds or rebates that the landlord receives (usually without objection from the landlord).

Insurance. The costs of insurance premiums, too, are sometimes negotiated.

Between 2020 and 2023 in particular, many areas of the country saw property insurance premiums sky-rocket—lowlying coastal areas that are prone to flooding immediately come to mind, but premiums have also risen steeply in landlocked states that are prone to wildfires (and, most recently, Hawaii), or tornadoes.

In other areas of the country—particularly the West Coast—earthquake insurance, although historically expensive, is more frequently pursued by landlords concerned with the ability of their aging sites to avoid sustaining significant damage when features of the sites are approaching their replacement (or required upgrade) age. Although tenants normally demand that landlords provide standard property and liability coverage for the site, not all have been willing to take on dramatically increased premiums, especially those associated with insurance coverages a tenant may not deem necessary for its own protection. And casualty insurance aside, recent developments in green and sustainable regulations have also become ubiquitous in lease provisions addressing

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January/February 2024 35

insurance coverages in certain states. For example, costs of endorsements related to the certification of a site in accordance with the EPA’s Energy Star rating and other similar standards. Many tenants— especially those leasing in such a state or locale for the first time—have been reluctant to agree to contribute to the costs of coverage they do not view as directly protecting their interests in the site and premises.

CAM—Allocation and Applicability. Unlike taxes and insurance, Opex charges associated with common area maintenance (CAM) often warrant more expensive negotiation in lease agreements, primarily because it is the broadest of the primary Opex categories. This breadth leaves the potential for all sorts of expenses and services to fall under its extensive umbrella. The term maintenance itself is a source of the inconsistencies that plague leases in their CAM provisions. Tenants, of course, would prefer to define the term maintenance in its most limited sense—that is, being strictly related to causing or enabling a condition or circumstance to continue—the condition or circumstance being the functionality of their premises (and, most likely, only their premises). Landlords, by contrast, are inclined to interpret the term in a broader sense and, if given free rein, would prefer a more expansive definition of maintenance to encompass anything necessary for the premises and site to continue functioning in their current

state, and anything necessary for such functionality to continue into the future per potentially evolving (and currently unknown) standards, to preserve the site’s functionality, and profitability. Most landlords would concede that such an overly inclusive definition incorporates most of the maintenance features to which they would ideally require their tenants to contribute.

Another often-contested issue is capital expenditures. Tenants usually succeed in requiring landlords to bear all costs associated with strict capital improvements that are truly made at the landlord’s discretion to add worth to the site. This is for good reason—without such provisions in their leases, tenants might find themselves financing spendthrift landlords’ pursuits of unnecessary extravagances and upgrades from which tenants would not realize a tangible benefit in the short term (or at all). That said, some argue that landlords should not be forced to bear the entire cost of all capital improvements.

The tenant and landlord bring different perspectives to this negotiation and the extent to which capital improvements costs are shared varies based on leverage and sophistication of the parties. In the authors’ experience, however, the landlord often can pass along the amortized costs of capital improvements necessary to comply with a change in the law or which are intended to reduce costs. These costs would be amortized over the useful life of the improvement, at a reasonable

interest rate. Some pass through, though will be based on the extent of actual, documented savings. Other categories of capital improvements may include the costs of improvements with the purpose of reducing the risk of health or safety to its occupants. There are difficult issues not often addressed in leases, such as how to determine whether something is a capital item or just a repair or maintenance cost— and how to determine the appropriate useful life.

Some Typical Exclusions from Operating Expenses As discussed above, operating expenses that are passed through to a tenant will include maintenance, operation, and other normal costs of the building. The tenant, however, will negotiate to exclude from operating expenses specific expenses that fall into the general category of landlord’s ownership of the building or site, or arising from defects or landlord negligence.

Within the foregoing general category of exclusions, there are some specific exclusions the landlord almost always accepts that cannot be passed through as CAM or operating expenses. These include depreciation; mortgage payments; leasing commissions; artwork; political contributions; salaries above the level of property manager; ground lease payments; tenant buildout costs for individual tenants; sums reimbursed by tenants or specifically included in rent of other tenants; costs for which the landlord is reimbursed by

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insurance or other parties; costs in connection with sales, financings, refinancings, or change of ownership; and landlord advertising or promotional expenses, among other items. Some more negotiable exclusion requests (which depend on the leverage of the parties) include landlord’s corporate overhead and general administrative expenses, insurance deductibles or deductibles above a certain amount, reserves, management fees above a capped amount (usually three to five percent of revenues of the building), as well as costs and fees paid to affiliates or subsidiaries of the landlord that exceed competitive or market rates. Some tenants might negotiate what constitutes revenue for purposes of the management fee—for example, whether insurance costs and taxes should be counted as revenue because they do not require much more than writing a check—and require a limitation that the management fees not exceed the cost of similar services provided in the area.

Capital improvements, repairs, and equipment are often part of the discussion of exclusions, and a typical tenant should try to limit the extent to which capital expenditures can be passed through, as discussed in the prior section. In addition, the tenant should try to negotiate exclusions for some related items, including landlord costs to correct structural, design, or engineering defects; legal noncompliance costs with respect to the period before the lease; and costs of environmental compliance or remediating hazardous wastes and materials (except to the extent created or caused by the tenant). The extent to which expenses relate to the parking garage is another area that a tenant might negotiate. The tenant who is likely paying monthly parking fees, for example, and paying an increased management fee because of revenues of the parking garage may resist also having to pay repair and maintenance costs related to the parking garage.

Caps on Operating Expenses A tenant can reduce the risk of an inordinate increase in operating expenses by negotiating a cap on operating expenses.

Providing for a cap of some form on operating expenses also can reduce the

need for painstakingly long lists of exclusions from operating expenses. Whether the landlord will agree to a cap is often market-driven and a question of leverage. If raised early enough—usually at term sheet or letter of intent stage—a cap on controllable operating expenses is not uncommon. This cap provides that expenses that are considered controllable by the landlord will not increase more than the cap. There are several issues to negotiate, including the definition of what is a controllable operating expense.

The tenant, of course, will request that all operating expenses except real estate taxes, insurance, utility costs, and maybe snow removal are controllable operating expenses and therefore are subject to the cap. The landlord will request a more general (perhaps even vague) definition that would include those items and maybe any other expense the landlord deems not controllable.

Another issue for negotiation is whether the cap limits on a year-to-year basis or is cumulative and compounding. The tenant obviously wants the cap to apply year to year on a noncumulative basis. This means the controllable costs cannot increase from the prior year by more than the negotiated percentage. The landlord will argue that the cap must apply on a cumulative basis, which would allow the landlord to recover any unused expenses in a prior year and apply them to a future year. For example, if the controllable cap is three percent on a cumulative basis, and one year the increase is only one percent, and the next year the increase is five percent, the landlord may carry over the extra two-percent cushion from the first year and therefore the tenant would pay the entire five percent increase (rather than the three percent) in the second year. The landlord will also ask for the cap to be compounding, which means if the first-year cap is at 1.05 the operating expenses of the prior year, the next year the cap of 1.05 would increase by a further five percent, and continue increasing by five percent from the prior-year cap.

Special Considerations Base Year and Gross Up of Base Year.

One version of a modified gross lease

(sometimes found in office leases) is a lease in which operating expenses are passed along to a tenant to the extent they exceed the amount of operating expenses in the base year (or initial year of the lease). The idea behind this rent structure is that the landlord should be able to predict operating expenses in the initial year and recoup them in the negotiated base rent amount. But over the life of the lease, operating expenses may increase beyond landlord expectations— and the landlord is not willing to rely on negotiated increases in the base rent amount to recoup increased costs (this shifts too much cost risk to the landlord).

Accordingly, the base year lease adds an additional layer of complexity to counsel for both sides, and one of the key issues will be whether the selected base year is an accurate reflection of the services and expenses in a typical year going forward.

When the tenant agrees to a base year rent structure, the tenant is intending to pay only the inflationary cost increase in the services and expenses provided in the base year. Of course, if new services are added after the first year, or the level of services is increased and passed through, the tenant will be paying all the cost of the new or increased services, not just the inflationary increase. Terrorism insurance—first required in some buildings after 9/11—when terrorism insurance was not part of tenant expenses in the base year is a historical example of this concern. The cost of COVID protocols first put in place after COVID is a more current example. Tenants with some negotiating leverage may try to avoid these increased costs by negotiating a provision in the lease that allows for an upward adjustment to base year expenses for costs of new services added later. The language might provide that if the operating expenses increase in a subsequent or comparison year due to change in law, policy or practice, then the increase in operating expenses will be included only to the extent of the increase in cost over what the estimated cost for such service would have been in the base year. The landlord, of course, has a similar, but opposite concern—what if base year expenses are artificially high because of extraordinary events like labor strikes or a spike in utility

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costs? The landlord might add language in a lease to exclude expenses relating to or arising from such extraordinary events.

Free rent concessions in the base year can also lead to an unexpected increase in expenses because free rent could cause the management fee to be understated in the base year. Therefore, the base year amount from the tenant perspective should be calculated without any free rent concessions—or based on the assumption that all tenants are paying full rent, as contrasted with reduced or free rent.

A low level of occupancy in a base year could cause operating expenses in the base year to be below normal, which in turn would cause the tenant to pay an increase in operating expenses because of increased occupancy in subsequent years.

A tenant should require that operating expenses (variable operating expenses) are grossed up in the base year to what the expense would have been had occupancy been at the 95 percent or 100 percent level. Of course, a harder question is what constitutes occupancy in this post-COVID period where office employees continue to work remotely part of the time—is it based on the amount of space in a building that is leased or some other measurement that reflects actual use, occupancy, and foot traffic by employees?

One last point—in any base year lease, when negotiating renewals the tenant should consider whether to ask to bring the base year forward to a more current base year. Operating expenses usually increase over time, so not bringing the base year forward may cause the tenant’s share of the increase in operating expenses to be higher than the tenant expected when negotiating the base rent for the renewal term.

Audit Rights. There are some additional rights a tenant needs as a check on operating expenses. As an initial matter, a tenant should obtain copies of the landlord’s operating expenses for several years before the lease effective date as due diligence during lease negotiations. These historical data provide the tenant with a needed baseline to gauge future operating expenses and the types of expenses included in operating expenses. A tenant also needs the right to audit operating expenses periodically. Operating expenses

usually are paid on a monthly basis based on the landlord’s estimate of operating expenses for the year. After the end of the year, the landlord will provide notice and a statement of what the actual operating expenses were for the prior year, and the tenant will receive a credit if any overpayment was made, or the tenant will pay any amounts owed if the estimated payments were less than actual expenses. The tenant needs a reasonably detailed statement of the actual operating expenses in the prior year, which should explain why the operating expenses went up or down as compared to the prior year. The tenant must have sufficient time from the receipt of the detailed statement to decide whether to conduct the audit. Thirty to sixty days likely is enough time to make the election and provide notice to the landlord that the tenant is exercising the audit right; provided, however, the tenant needs additional time from the date of giving notice of the audit election to conduct the audit, and taking into consideration the location of the books and records. One hundred and eighty days, or more, would be nice for this.

Negotiators must also consider who can conduct the audit. The landlord will resist any auditor who gets paid on a contingency basis, and the landlord may require an auditor from one of the big, national accounting firms—which would be expensive. The tenant, however, needs to make certain that it has some flexibility in choosing an auditor—perhaps the criteria should just be a CPA getting paid on an hourly basis. The landlord will insist that no audit can occur if the tenant is in default.

The audit provision should make clear that if the audit reveals an overpayment, the tenant will receive a credit against the next additional rent payment due, or a payment from the landlord (especially if the lease has terminated) in the amount of the overpayment. The landlord, of course, will want the ability to dispute the findings of the audit and will want the audit to be kept confidential. If the landlord’s calculation of operating expenses is incorrect—by more than some percentage, say five percent—then the tenant is often reimbursed some of its fees and expenses up to a negotiated, capped amount.

If the lease is a modified gross lease, the tenant needs to conduct an audit of the base year or have a longer period of time to conduct the audit of the base year.

Without an audit of the base year, a tenant will not know what services and expenses were included in the base year and will not have all it needs to determine whether or not to decide to audit. The landlord, however, will want the tenant’s right to audit the base year to end at some point— it will need to be able to close the books on the base year and not be concerned that the base year versus comparison year adjustments can be challenged well into the future.

Conclusion Opex charges can constitute one of the most significant types of rent due under any sort of lease agreement, and any standards or guidelines governing their inclusion or calculation are anything but well settled or universally accepted among landlords and tenants nationwide. The type (but not title) of the lease and its structure, the location of the premises, the features of the site in which the premises are situated, and the relative bargaining power of the parties are all factors that inform the negotiations of the parties on these points. Further, once the type of Opex charges and the methods by which they are determined are settled upon in a lease agreement, the parties then must also ensure that the lease incorporates additional provisions and measures sufficient for each party to be reasonably protected from being saddled with liability for excessively high operational costs.

Although this article has attempted to provide a useful introduction to some of the basic concepts to be aware of when negotiating lease provisions addressing Opex charges, the authors note that there remain countless variations and adaptations of the concepts discussed above, many of which are ever-changing. Care should always be taken to ensure that both parties to a lease are completely aware of what Opex charges they will be responsible for; how those amounts will be allocated, imposed, or estimated; and what safeguards are at their disposal in the event Opex charges become excessively burdensome. n

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Solving GenerationSkipping Transfer Tax Problems

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Five Practical Remedies to Resolve Exemption Allocation Issues

By Carol Warley, Abbie M. B. Everist, Amber Waldman, and Rachel Ruffalo

T

he intricacies of estate planning often bring to light a range of complex tax considerations, including the generation-skipping transfer tax (GSTT). Understanding the implications associated with the imposition of the GSTT is crucial when reviewing an estate plan, as it can significantly affect the distribution of wealth and the preservation of family assets.

The allocation of a transferor’s generation-skipping tax (GST) exemption protects transfers from the GSTT. The inclusion ratio of a trust, calculated under IRC § 2642(a), determines the portion of the trust assets that is subject to GSTT. The 40 percent flat GSTT is imposed on three triggering events: (1) a direct skip with no remaining GST exemption available under section 2612(c), (2) a taxable distribution from a trust with an inclusion ratio other than 0.000 under section 2612(b), and (3) a taxable termination of a trust with an inclusion ratio other than 0.000 under section 2612(a).

Carol Warley is RSM’s Washington National Tax private client services tax practice leader. Abbie M. B. Everist, Amber Waldman, and Rachel Ruffalo are members of RSM’s Washington National Tax practice.

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January/February 2024 39

Inclusion Ratio

Colloquial term

Explanation

0.000

GST exempt

A zero inclusion ratio means 0% of the trust assets are subject to GSTT.

1.000

GST nonexempt

A one inclusion ratio means 100% of the trust assets are subject to GSTT.

Other than 0.000 or 1.000

Mixed inclusion ratio

An inclusion ratio other than zero or one means that a fraction of the trust assets is subject to GSTT. A trust with an inclusion ratio other than 0.000 or 1.000 is a good candidate for a qualified severance.

Problem 1: Trust with an unintended mixed inclusion ratio due to unreported transfers made prior to automatic allocation rules

Remedy 1: Timely manual allocation relief under Rev. Proc.

2004-46

Problem 2: Inadvertent automatic Remedy 2: Private letter ruling allocation of transferor’s GST to request timely election relief exemption; no affirmative opt-out under section 9100 election made Problem 3: Erroneous opt-out election made on a gift to a trust intended to be GST exempt

Remedy 3: Late allocation of transferor’s GST exemption

Problem 4: Untimely death of non-skip persons, resulting in unexpected skip person beneficiaries receiving nonexempt trust assets

Remedy 4: Retroactive allocation of transferor’s GST exemption

Problem 5: Mixed inclusion ratio with respect to an indirect skip trust that will benefit both skip and non-skip persons

Remedy 5: Qualified severance to sever trust into (1) a GST exempt trust with an inclusion ratio of 0.000 and (2) a GST nonexempt trust with an inclusion ratio of 1.000

Below, we delve into five common GST exemption allocation problems that may arise when reviewing the GST status of a trust. We then provide suggested remedies to mitigate potential unintended consequences.

Problem 1: Trust with an Unintended Mixed Inclusion Ratio Due to Unreported Transfers Made Prior to Automatic Allocation Rules Section 2632(c) enacted a deemed allocation of a transferor’s GST exemption to certain lifetime transfers to indirect skip GST trusts (GST Trust) after December 31, 2000. Before that date, GST exemption had to be manually allocated to transfers other than direct skips on a timely filed gift tax return. If clients made gifts to a GST Trust (under section 2632(c)(3) (B)) before and after December 31, 2000, and did not consider the GST exemption implications, they may have a trust with a mixed inclusion ratio.

For example, a client funded a life insurance trust in 1998 that is a GST Trust. The client has never reported transfers to this trust on a gift tax return because a Form 709 was not required.

All gifts made to the trust were below the annual exclusion and were present interests because the beneficiaries had the right to withdraw the entirety of each transfer. The client made the transfers listed on page 41.

The transfers made in 1998, 1999, and 2000 are not protected from the GSTT. For 2001 and future years, an automatic allocation of the transferor’s GST exemption occurred, and the portion of the trust related to those transfers is protected from the GSTT. The failure to file gift tax returns to manually allocate GST exemption to the 1998, 1999, and 2000 transfers to this trust resulted in a mixed inclusion ratio. This means that a portion of the trust assets are not protected from the GSTT. This situation may be remedied, however, by the relief provided in Rev. Proc. 2004-46.

Remedy 1: Timely Manual Allocation Relief under Rev. Proc.

2004-46 In any situation where an error or

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Year

Value immediately before current year transfer

Value of current year transfer

Allocation of GST Exemption

1998

$0

$5,000

No GST exemption allocation

1999

$5,100

$5,000

No GST exemption allocation

2000

$10,500

$5,000

No GST exemption allocation

2001

$16,000

$5,000

Automatic allocation of transferor’s GST exemption

oversight may have occurred, by either the client or prior advisors, it is recommended to start by having a conversation.

This conversation should be focused on your clients’ intentions for the trust. Do they think that non-skip persons will deplete the trust before it ever benefits skip persons? If so, they may not be concerned with the mixed inclusion ratio and instead may be concerned with the potential waste of their GST exemption in 2001. If they do think the trust will benefit skip persons, the conversation will shift to how to protect the trust from the GSTT. The mixed inclusion ratio issue is related to the transfers made in 1998, 1999, and 2000 in which automatic allocation rules did not apply, leaving the transfers susceptible to GSTT exposure.

The solution to this problem is Rev. Proc.

2004-46, which provides a special rule for pre-2001 present interest gifts under the annual exclusion. It allows taxpayers to go back and file gift tax returns as if they are making a timely manual allocation using date of transfer values. To take advantage of this relief, the client should file gift returns for 1998, 1999, and 2000 to allocate the available GST exemption following the other reporting requirements

outlined in the revenue procedure. After filing those returns, the trust will have an inclusion ratio of 0.000. By taking advantage of this remedy, the client limits the amount of GST exemption needed to allocate to fully protect the trust and potentially saves a significant amount of GSTT if assets do benefit skip persons.

If the client does not take advantage of this revenue procedure or the gifts made do not qualify for this method, there are other remedies available, such as relief under section 9100 (see Problem 2 below), a late allocation of GST exemption (see Problem 3 below), or a qualified severance (see Problem 5 below).

If the client did not intend for the trust to be GST exempt, additional remedies are available, such as a private letter ruling (PLR) to request relief to make a timely opt-out election under section 9100 (see Problem 2 below) or a qualified severance (see Problem 5 below).

Problem 2: Inadvertent Automatic Allocation of Transferor’s GST Exemption; No Affirmative Optout Election Made Sometimes when filing a gift tax return, the preparer may fail to make an

affirmative GST election. If a trust formed after 2000 is a GST Trust, the transferor’s available GST exemption will be automatically allocated to transfers made to the trust. In the alternative, if a trust is not a GST Trust, no GST exemption would be allocated to transfers made to the trust unless made manually. Automatic allocation rules were enacted as a safety net to protect trusts from exposure to GSTT. The rules themselves, however, may cause unintended consequences. If you have a trust that is a GST Trust but will never benefit skip persons, an automatic allocation of the transferor’s GST exemption to that trust could be a waste of the transferor’s exemption.

For example, a taxpayer and spouse filed 2012 gift tax returns that reported a $1 gift to a grantor-retained annuity trust (GRAT). They relied on their prior tax professional to make an opt-out election on the 2012 gift tax returns to prevent the automatic allocation of their GST exemption after the estate tax inclusion period (ETIP). The professional failed to do so.

The trust is a GST Trust and there is a remote chance it could benefit skip persons. The clients expect that their child, a non-skip person, will fully deplete the trust. The trust does not need to be protected from the GSTT. The GRAT value at the end of the ETIP is $10,240,000.

In 2021, the GRAT matured, and no opt-out election was made at the end of the ETIP on the 2021 gift tax returns. The taxpayer and spouse elected to split gifts in 2012 and 2021. Because no opt-out elections were made, $5,120,000 of the taxpayer’s and $5,120,000 of the spouse’s available GST exemptions were automatically allocated to the trust. The trust ultimately goes outright to their child, so the automatic allocation was a significant waste of the transferors’ available GST exemptions.

Remedy 2: Private Letter Ruling to Request Timely Election Relief Under Section 9100 To rectify the failure to make an election for GST purposes, we can look to section 9100 for relief. Section 9100 relief grants an extension of time to make certain regulatory elections. If relief is granted, it provides the same effect as if an opt-out

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January/February 2024 41

wants to ensure that it is protected from the GSTT. Section 9100 relief is not available to undo the opt-out election.

election had been made timely. Under Notice 2001-50, extensions of time for GST purposes may be granted under Treas. Reg. § 301.9100-3. To take advantage of the 9100 relief for failure to make a GST election, the taxpayer must request relief through a private letter ruling (PLR) from the IRS. This type of relief can be costly. The standard cost for a PLR in 2023 is $12,600, plus an additional $3,800 for an identical spousal letter for gift-splitting purposes. The related legal and accounting fees would be even more significant.

Generally, the IRS will grant relief if the taxpayer shows she acted reasonably and in good faith. Also, the IRS considers whether the government would be prejudiced by granting the relief. In this example, the IRS grants the relief. The taxpayer files an amended 2012 gift tax return to make the opt-out election and attaches the PLR. The election will be treated as if it were made timely on the 2012 gift tax return, preventing the automatic allocation of the transferors’ GST exemption at the end of the ETIP in 2021.

This will result in saving $5,120,000 of each of the transferors’ GST exemptions.

Allocation of GST exemption to a trust subject to an ETIP will not take effect

until the period has ended. GRATs generally result in a nominal taxable gift but are expected to appreciate, leaving significant assets in the trust after the ETIP. Accordingly, with GRATs, the taxpayer should generally opt-out of an automatic allocation of GST exemption on the gift tax return reporting the initial transfer.

The taxpayer would then wait until the GRAT has terminated and the ETIP has ended to decide whether to make an allocation of the available GST exemption.

Problem 3: Erroneous Opt-out Election Made on a Gift to a Trust Intended to Be GST Exempt In contrast to failing to make a GST election, making an erroneous optout election is another common error.

Taxpayers cannot use 9100 relief if an erroneous election was made. That relief is generally available only when no election has been made and the transferor is seeking relief to make a timely election.

For example, upon reviewing your client’s prior gift tax returns, you notice an opt-out election was made for a gift of $4 million to a trust in 2021. The value of the trust assets today is $4.5 million.

The trust is intended to benefit the transferor’s grandchildren, so the transferor

Remedy 3: Late Allocation of Transferor’s GST Exemption A late allocation is available for trusts that are not fully GST exempt trusts where the taxpayer wishes to allocate an available GST exemption to a trust. There are two scenarios where late allocation may be helpful: First, during an economic downturn, opting out of automatic allocation rules for higher-value transfers and making a late allocation of GST exemption based on a lower value to preserve a larger portion of the transferor’s GST exemption; second, solving our problem above, when GST exemption was not allocated on the original transfer and the transferor now wants to allocate to protect the assets from the GSTT. The late allocation should be reported on a late gift tax return. The allocation is made based on date-of-filing values and is effective as of the date of filing. A taxpayer may elect, however, to use the first day of the filing month for the value of the allocation. Note that this election is not available for life insurance if the transferor passes away before the effective date of the late allocation.

In the example above, the taxpayer can file a late gift tax return to allocate $4.5 million of the available GST exemption to the trust to fully protect it from the GSTT. The taxpayer would also want to terminate the opt-out election on the next timely filed gift tax return and make an opt-in election. This will ensure that the available GST exemption will be automatically allocated to any future transfers to the trust, whether or not they are reported on a gift tax return.

Problem 4: Untimely Death of Non-skip Persons, Resulting in Unexpected Skip Person Beneficiaries Receiving Nonexempt Trust Assets Generally, transferors will not allocate their GST exemptions to trusts that they expect will benefit only non-skip persons, but would instead save their GST exemption for other planning that is intended to benefit future generations. For example,

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in 2012, a taxpayer funded a trust for her child. The trust agreement states that the assets will be distributed outright to that child when the child reaches age 40.

When the original transfer was made, of course, the transferor did not expect that the trust would benefit skip persons or be subject to GSTT. The child predeceased the transferor in 2023 at age 30 and unexpected GSTT is due. The assets now stay in trust for the transferor’s grandchildren. At the death of the child, a taxable termination occurs and the trust is fully subject to GSTT due to its inclusion ratio of 1.000. Because the taxpayer did not allocate any of his GST exemption to the trust, the trust is liable for the GSTT even if the transferor had available GST exemption remaining.

Remedy 4: Retroactive Allocation of Transferor’s GST Exemption A retroactive allocation under section 2632(d) provides a remedy for untimely death. It allows for GST exemption to be chronologically allocated at original date of transfer values effective the moment right before the non-skip person’s death.

The generosity of this relief is amplified by the fact that the available GST exemption is higher today than it was at the time of the original transfer. Even if there was not enough GST exemption available to fully protect the trust on the original transfer, the transferor’s GST exemption available in the non-skip person’s year of death can be used.

The allocation must be made on a timely filed gift tax return for the year of the non-skip person’s death, including extensions. In this example, the taxpayer would need to make a retroactive allocation of the available GST exemption to the trust by April 15, 2024 (or October 15, 2024, if extended). The allocation will be effective immediately before the child’s death using the value of the original 2012 transfer to the trust. The allocation is effective before the taxable termination. If the transferor had adequate GST exemption to fully protect the trust, there would be no GSTT liability related to the taxable termination after the retroactive allocation.

Note that distributions made to skip persons before the retroactive allocation

are not affected by the retroactive protection from the GSTT. Because the allocation is effective immediately before the child’s death, any prior GSTT triggering events were still subject to the GSTT. The retroactive allocation will protect distributions made to skip persons after the death of the non-skip person. There may also be further complications related to trusts that have been modified or have been decanted into new irrevocable trusts before the untimely death.

Problem 5: Mixed Inclusion Ratio with Respect to an Indirect Skip Trust That Will Benefit Both Skip and Non-skip Persons Trusts that benefit both non-skip and skip persons with a mixed inclusion ratio can expose trust assets to unnecessary GSTT. In addition, it may be expensive and time-consuming to manage the related GSTT compliance when distributions are made to skip persons from such trust.

For example, a trust with an inclusion ratio of 0.500 makes a $100,000 distribution to a skip person beneficiary. The beneficiary would be liable for GSTT of $20,000 (inclusion ratio of 0.500 x $100,000 distribution x 40% GSTT). The trustee would be responsible for filing Form 706-GS(D-1) to inform the beneficiary of the information needed for the beneficiary to file Form 706-GS(D). To avoid these consequences, a trustee may be interested in exercising a qualified severance under section 2642(a)(3)(B).

Remedy 5: Qualified Severance to Sever Trust into (i) a GST Exempt Trust with an Inclusion Ratio of 0.000 and (ii) a GST Nonexempt Trust with an Inclusion Ratio of 1.000 To solve the problems associated with a mixed inclusion ratio trust that has both skip and non-skip beneficiaries, the trustee may desire to sever the trust. A qualified severance is the division of a single trust with a mixed inclusion ratio into two or more identical but separate trusts, one of which is GST exempt (inclusion ratio of 0.000) and one of which is not (inclusion ratio of 1.000). Logistically, the trusts must receive a fractional

share of the total value of assets equal to the fraction of the single trust before the severance. The trust and the severance must meet all the criteria required under section 2642 and Treas. Reg. § 26.26426(d), including being allowed by the trust agreement, being effective under local law, and having the same succession of interest to beneficiaries. The trustee must establish a date of severance, and funding must occur within 90 days of the effective date of the severance. The qualified severance also must be reported on Form 706-GS(T). The trustee would be responsible for filing Form 706-GS(T).

Once the severance has been properly executed, it is recommended that the GST nonexempt resulting trust (inclusion ratio of 1.000) make distributions to and be depleted by the non-skip person beneficiaries because it is not protected from GSTT. The GST exempt trust (inclusion ratio of 0.000) should make distributions to and be set aside for the benefit of the skip person beneficiaries because it is protected from GSTT. In our example above, after the severance, the trustee could make future distributions to the skip persons out of the GST exempt trust.

By doing so, the beneficiaries would not be liable for GSTT because the inclusion ratio of the exempt trust is 0.000.

Conclusion To ensure a smooth and least-complicated approach to the GSTT, it is crucial to initiate discussions on GSTT planning early in your client’s lifetime. Including discussions around GSTT is imperative when developing or revising a client’s estate plan. This will include conducting periodic and comprehensive reviews of the client’s gift tax returns to ensure that the elections made and the GST exemption allocated align with the client’s estate plan and expectations.

It is vital to incorporate discussions on planning for existing trusts and strategize the optimal utilization of the transferor’s available GST exemption within these planning conversations. By consistently integrating discussions around GSTT into your planning conversations, you will provide substantial benefits and value to your clients and their families. n

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January/February 2024 43

Representations and Warranties in Real Estate Sales Contracts Getty Images

By Norman R. Newman

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T

he most common and frequently used mechanisms for contractual risk allocation in a variety of business transactions are representations and warranties coupled with indemnification against loss or liability resulting from breaches thereof. In particular, contract drafters use representations and warranties to allocate and shift financial risk in asset purchase agreements, mergers and acquisitions, and, of course, real estate transactions. Indemnification provides protection against loss or liability arising out of the untruth or inaccuracy of any representation and the resulting breach of the accompanying warranty.

Beyond the basic terms of a real estate purchase and sale agreement (PSA), which identify the parties, describe the property, and specify the purchase price, some of the most important and vigorously negotiated provisions are the representations and warranties of the seller and the related indemnities. Tension normally exists between buyers and sellers regarding the scope of representations and warranties to be provided by the sellers and the extent to which the buyers should be able to rely on those representations and warranties.

Also, the buyer under a PSA wants indemnification against the consequences of a breach of the seller’s representations and warranties.

On the other hand, the seller wants to give as little as possible in the way of representations and warranties and indemnity (i.e., the traditional caveat emptor mentality). The practical and reasonable resolution of this conflict is for the seller to tell the buyer what it knows about the property (using the “best knowledge” qualifier as an antecedent to the representations and warranties) and not actively conceal or withhold material information, and for the buyer to rely primarily on its own due diligence investigation (i.e., “trust but verify”). To the extent that the scope of the seller’s representations and warranties is limited or qualified, the seller’s liability under any supporting indemnity should be mitigated accordingly.

Norman R. Newman is Senior Counsel in the Indianapolis office of Taft, Stettinius & Hollister LLP, where he practices in the areas of real estate law and business law.

Case law defines a representation as a statement of a past or present fact made by a party as of a moment in time to induce reliance by the other party. It is not a statement of something that will happen or is to be done in the future. That would be a covenant. Nor can there be actionable fraud for misrepresentation of an intent or state of mind. See Sachs v. Blewett, 185 N.E. 856 (Ind. 1933) (holding that there is no such thing as promissory fraud). A representation states a past or present fact, i.e., something that objectively and presently exists or that previously existed or happened. Its essential purpose is to induce reliance in the recipient.

A warranty is a promise that the representation is true. So when the representation is coupled with a warranty, it provides the recipient with assurance of the truth of the representation and remedies if it is not. These remedies include damages, restitution, and avoidance of the contract. If damages are claimed, they may include out-of-pocket costs, benefit of the bargain, and, in the case of intentional misrepresentation, punitive damages.

It is possible to have a representation without a warranty. In that case, however, if the representation is untrue or inaccurate, the recipient must prove justifiable reliance on its part and either fraudulent intent or negligent misrepresentation on the part of the maker of the false statement in order to recover damages or seek avoidance of the contract. In other words, the recipient of a naked representation must prove the elements of common law fraud.

If the representation is coupled with a warranty of its truth, then the recipient’s burden of proof is significantly reduced and simplified. There is no need to prove either fraudulent intent of the maker or reliance of the recipient. All that must be shown is that the statement was in fact false or inaccurate. It is a claim for breach of warranty, rather than misrepresentation, sounding in contract rather than tort.

As indicated, representations and warranties are a contractual risk-shifting device. The degree to which risk may be shifted depends upon the specific language of the representations and warranties. For example, if the seller of an improved property (i.e., a building) makes

an absolute and unqualified representation and warranty that the property is free of defects, this wholly negates the doctrine of caveat emptor and shifts the entire risk of the possible existence of defects to the seller. And it affords the buyer the right to sue the seller or to rescind the contract if there is any defect in the property. The dynamic changes significantly if the seller qualifies the representation and warranty with a knowledge qualifier. Some of the risk is shifted back to the buyer if the seller represents and warrants that “to its knowledge” the property is free of defects. In that case, the seller is liable for breach of the warranty only if it had knowledge of a defect but concealed it. And the buyer’s burden of proof is increased because it must prove that the seller had knowledge of the defect but failed to disclose it.

Some additional parsing of the language can further reduce the seller’s liability. For example, the seller might say “to the best of my knowledge, but without investigation or inquiry.” This additional qualifying language most likely would deprive the buyer of a claim for negligent misrepresentation. And the seller’s liability can be limited even further if he says only that he has no knowledge of any material defects. This materiality qualifier shifts the risk of minor defects back to the buyer.

Understand, though, that even if the buyer is successful in negotiating and obtaining some representations and warranties from the seller concerning the condition of the property, this is never a substitute for the buyer’s own due diligence investigation. It is simply a matter of “trust but verify.” Notwithstanding that the buyer may trust the seller, the buyer still must verify the truth and accuracy of the facts and matters represented and warranted by the seller. This can be accomplished only by conducting a thorough due diligence investigation of the property before closing.

To aid the buyer’s due diligence investigation of the property, the seller should also be obligated to deliver to the buyer those historical records and documents concerning the property that the seller has in his possession, such as old environmental reports, geotechnical data, surveys in the case of raw land, and maintenance

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January/February 2024 45

and repair records and operating reports in the case of existing buildings, and the buyer should have all of this information verified and updated in the course of his due diligence investigation. A prudent seller, however, may disclaim any responsibility for the accuracy or reliability of any of the information furnished because most of it is the work product of others. In that event, the buyer should request (and be prepared to pay for) a reliance letter from each professional who has provided any such report or data to the seller.

Also note that the scope and subject matter of the representations and warranties in a PSA are fact-sensitive and governed by the type of transaction.

There is no “one-size-fits-all” when it comes to contractual representations and warranties.

For example, in a transaction involving the sale and purchase of improved property, the representations and warranties will focus heavily on the physical condition of the improvements and their various components, e.g., roof, structural elements, and HVAC system; on compliance of the improvements with applicable laws, ordinances, and codes; and on absence of environmental defects and violations.

If the transaction involves the sale and purchase of investment property, e.g., an office building or a shopping center, the representations and warranties also will focus on the financial performance of the asset. This includes such things as the revenue stream (i.e., rents and other charges), operating costs, debt service, the quality of the leases and tenants (i.e., the rent roll), and the absence of litigation affecting the property.

If the transaction involves the sale and purchase of raw land for development, the representations and warranties will focus on the “buildability” of the site. This includes confirmation that the property is properly zoned for the buyer’s intended development, all necessary utilities (i.e., electricity, water, gas, telephone, fiber optic cable, and storm and sanitary sewers) are available at the site, soil and drainage are suitable for development of the property, and the site has adequate access for development (i.e., abutting public streets, curb cuts, and median cuts).

There is no “onesize-fits-all” when it comes to contractual representations and warranties.

Also, the majority of the seller’s representations and warranties will be effective as of the moment the PSA is signed, unless otherwise specified. Circumstances may change after that time and before the closing. So, the buyer’s obligation to close and purchase the property should be conditioned upon the continued truth and accuracy of the seller’s representations and warranties until the moment of closing.

The PSA also should provide for the seller’s affirmation of the representations and warranties as of the closing date. This is the so-called bring-down provision.

Also, it is customary to provide that the representations and warranties and the accompanying indemnity will survive the closing of the transaction for a specified period. This is subject to negotiation; however, it is usually a period of at least one year following the closing of the transaction. In the absence of a provision to the contrary in the PSA, the seller’s representations and warranties and any supporting

indemnity are merged into the conveyance and do not survive the closing. See Warner v. Estate of Allen, 776 N.E.2d 422 (Ind. App. 2002).

Of course, for an “as is” sale of property, the seller makes no representations and warranties regarding the condition or suitability of the property. In that case, the conditions precedent to the buyer’s obligation to close are crucial. The buyer will condition its offer to purchase on the suitability of the property for the buyer’s intended use or development and the absence of defects or deficiencies. Here again, “suitability” includes such things as proper zoning, availability and capacity of public utilities, suitability of the soil and drainage, and convenience of access.

And, of course, the suitability condition must be coupled with a contractual provision that allows the buyer ample time to conduct a thorough due diligence investigation of all of these matters and to terminate the PSA and receive a refund of the earnest money if it is not satisfied with the results of its due diligence investigation.

Note, however, that even if the sale of property will be “as is,” without any representations and warranties regarding the condition of the property or its suitability for a particular purpose, the buyer should still require the seller to represent and warrant certain basic facts regarding the property before the buyer undertakes a costly and time-consuming due diligence investigation of the property. These basic facts include the following: • The seller owns marketable title to the property in fee simple and the property is free of any easements or restrictions that could prevent the buyer’s intended use or development of the property.

• The seller has no knowledge of any contamination, hazardous substances, USTs, or other environmental defects on the property or of any other conditions that could prevent the buyer’s intended use or development of the property.

• There are no condemnation proceedings pending or, to sellers’ knowledge, threatened against the property.

• There are no suits, judgments, or

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other legal proceedings pending or, to the seller’s knowledge, threatened against the seller or the property that could prevent the seller from entering into and performing this agreement.

• The seller is not obligated to sell, lease, or mortgage the property to any other person or entity, and there are no other agreements by which the seller is bound that could prevent the seller from entering into and performing this agreement.

• There are no mortgages or other liens against the property that cannot be discharged out of the proceeds at closing and no leases or tenancies that could deprive the buyer of possession of the property.

In other words, the buyer should not undertake a costly and time-consuming due diligence investigation without some minimal assurance that the seller owns the property and that there is no insurmountable impediment to the transaction. But also note the use of the knowledge qualifier that limits the seller’s liability with respect to several of these representations and warranties.

The scope of the representations and warranties in any given transaction depends on the relative leverage and negotiating skills of the parties to the transaction. No buyer always gets all of the representations and warranties it wants.

Sometimes the seller may refuse to provide any representations and warranties regarding the condition of the property or assets being sold, leaving the buyer to rely solely on its due diligence investigation. In that situation, matters that otherwise would have been represented and warranted by the seller must be conditions precedent to the buyer’s obligation to close the transaction. And, of course, if there are representations and warranties, their continued truth and accuracy should be a condition precedent to closing These are some of the fundamental issues that must be addressed in the negotiation and drafting of representations and warranties for the sale and purchase of commercial real estate. What follows are a couple of examples of representations and warranties from some real-world contracts.

Excerpt from Short-Form Purchase and Sale Agreement Seller’s Representations and Warranties: Seller represents and warrants the following facts and matters: a) Title: Seller owns marketable title to the Land in fee simple and the Land is free of any easements or restrictions that could prevent development of the Project on the Land. b) Environmental: Seller has no knowledge of any contamination, USTs, or other environmental defects on the Land or of any other conditions that could prevent development of the Land. c) Condemnation: There are no condemnation proceedings pending or, to Sellers’ knowledge, threatened against the Land. d) No Litigation: There are no suits, judgments, or other legal proceedings pending or, to Seller’s knowledge, threatened against Seller or the Land that could prevent Seller from entering into and performing this Agreement. e) No Obligations: Seller is not obligated to sell, lease, or mortgage the Land to any other person or entity and there are no other agreements by which Seller is bound that could prevent Seller from entering into and performing this Agreement. f) No Liens or Leases: There are no mortgages or other liens against the Land that cannot be discharged out of the proceeds at Closing and no leases or tenancies

that could deprive Buyer of possession of the Land.

The foregoing representations and warranties must be true and correct at the time of Closing and will survive the Closing. ********** Excerpt from Long-Form Shopping Center Purchase and Sale Agreement REPRESENTATIONS AND WARRANTIES OF SELLER: To induce Buyer to execute this Agreement, Seller represents and warrants to Buyer as follows: A. ORGANIZATION: Seller is a ________________ duly organized and validly existing under the laws of the State of its organization.

B. AUTHORITY: Seller has the full right, title, power, and authority to enter into this Agreement and to consummate a sale of the Property, and all persons whose signatures are necessary to sell the Property are duly authorized to execute and have duly executed this Agreement.

C. NO LITIGATION: No action, suit, claim, arbitration, litigation, or other proceeding is pending or threatened against the Property or any part thereof.

D. NO CONDEMNATION: Seller has not received any notification from any governmental agency or authority, or any public utility, of any pending or threatened condemnation of or assessment

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against the Property or any part thereof or any proposed taking of any portion of the Property, any proposed assessment for public improvements, or any proposed increase in the cost of utility services.

E. BINDING EFFECT: This Agreement and all documents executed pursuant hereto by Seller are valid and binding upon and enforceable against Seller in accordance with their respective terms, and the transaction contemplated hereby will not result in a breach of or constitute a default or permit acceleration of maturity under any mortgage, deed of trust, loan agreement, or other agreement to which Seller or the Property is subject or by which Seller or the Property is bound.

F. CONTRACTS: Exhibit B is a true, correct, and complete list of all service and maintenance contracts and amendments and modifications thereof. To Seller’s knowledge, there are no defaults under any of the contracts, all of the contracts are in full force and effect, and all of the contracts are terminable without cost to Buyer on or before the Closing Date.

G. PERMITS: Exhibit C is a true, correct, and complete list and is an accurate description of each of the permits and licenses, as amended and in effect. Each of the permits and licenses is in full force and effect. Neither Seller nor any employee of Seller has received notice of any intention on the part of the issuing authority

to cancel, suspend, or modify any of the permits or licenses or to take any action or institute any proceedings by any governmental agency for the use or occupancy of the Property or to effect such a cancellation, suspension, or modification.

H. LEASES: Exhibit D is a true, correct, and complete list of all of the tenants leasing any part of the Property under all Leases.

I. TITLE: Seller has good and marketable fee simple title to the Real Estate and to all personal property and each item thereof, all free and clear of all liens, security interests, encumbrances, leases, and restrictions of every kind and description, except the permitted title exceptions, approved Leases and liens, and encumbrances to be released on the Closing Date.

J. NO LIENS: The interest of Seller in the Leases and the contracts and the licenses is free and clear of all liens and encumbrances and has not been assigned to any other person, except as reflected in the permitted title exceptions and liens and encumbrances to be released on the Closing Date.

K. POSSESSION: Except for tenants under the approved Leases, there are no persons in possession or occupancy of the Property or any part thereof, nor are there any persons who have possessory or other rights or claims with respect to the Property or any part thereof.

L. ACCESS: Seller has obtained all licenses, permits, easements, and rights‑of‑way, including proof of dedication, required from all governmental authorities having jurisdiction over the Property or from private parties to make use of utilities serving the Property and to insure access and ingress and egress to and from the Property.

M. ZONING: The zoning classification of the Real Estate pursuant to the ____________________ Zoning Ordinances permits the operation of the Property for its current uses. The Improvements on the Property have been constructed and are presently used and operated in compliance with all licenses and all legal requirements, and with all covenants, easements, and restrictions affecting the Property, and all obligations of Seller with regard to the legal requirements, covenants, easements, and restrictions have been and are being performed in a proper and timely manner. Seller’s use of the Real Estate does not constitute a nonconforming use under applicable zoning laws and ordinances.

N. UTILITIES: All water, sewer, gas, electric, telephone, cable, and drainage facilities and all other utilities and public or quasi‑public improvements upon or adjacent to the Property required by law or for the normal operation of the Property are installed, are connected under

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valid permits, are in good working order, are adequate to service the Property, and are fully paid for.

O. IMPROVEMENTS: All of the Improvements on the Real Estate are in good condition and have been properly maintained without deferring any appropriate maintenance for similar buildings since Seller’s ownership of the Property.

P. ENVIRONMENTAL: No Hazardous Material (as defined below) has been used, generated, manufactured, stored, treated, released, or disposed of at, in, on, or under the Property in violation of any Environmental Law (as defined below); nor is the Property in violation of any Environmental Law. As used in this Agreement, the term “Hazardous Material” means any substance or material that is or becomes regulated, defined, or designated by any federal, state, or local governmental authority as hazardous, extremely hazardous, imminently hazardous, dangerous, or toxic, or as a pollutant, contaminant, or waste, and shall include, without limitation, PCBs, asbestos, asbestos-containing materials, oil, and petroleum products and byproducts. As used in this Agreement, the term, “Environmental Law” means all current and future federal, state, and local statutes, regulations, ordinances, and rules relating to (i) the emission, discharge, release, or threatened release of any Hazardous Material into the air, surface water, groundwater, or land; (ii) the manufacturing, processing, use, generation, treatment, storage, disposal, transportation, handling, removal, remediation, or investigation of any Hazardous Material; or (iii) the protection of human health, safety, or the indoor or outdoor environment, including without limitation, the Clean Air Act; the Federal Water Pollution Control Act; the Resource Conservation and Recovery Act; the Comprehensive Environmental Response, Compensation and Liability Act; the Occupational Safety and Health Act; the Endangered Species Act; all amendments thereto; all regulations promulgated thereunder; and their state statutory and regulatory counterparts.

Q. EMPLOYEES: With the exception of the management agreement, if any, there

are no employment, employee benefit, or collective bargaining contracts affecting the Property. There are no employees of Seller engaged in the operation of the Property.

R. COMPLIANCE: Seller’s operation of the Property is in full compliance with all applicable laws, ordinances, codes, and orders and there are no governmental or private actions, proceedings, or notices pending or threatened against Seller for violation of any such laws, ordinances, codes, or orders.

S. FINANCIAL REPORTS: The Financial Reports fully, fairly, and accurately reflect and represent the financial results of the operation of the Property during the periods covered thereby.

T. BROKERS: There are no brokerage fees or commissions due or which hereafter may become due in connection with any of the Leases (including any renewals or extensions thereof) that could result in a lien against the Property or any part thereof under I.C. 32-28-12.5-1 et seq.

U. NON-FOREIGN INVESTMENT: Neither the Seller nor any of the members, partners, shareholders (whether or not a controlling interest), officers, or directors of the Seller: (i) is listed on the SDN List (as defined below) maintained by OFAC (as defined below) or any other similar list maintained by the United States Department of State, Department of Commerce, or any other government authority or pursuant to any Executive order of the President; (ii) have been determined to be subject to the prohibitions contained in Presidential Executive Order No. 13224; or (iii) have been previously indicted for or convicted of any USA Patriot Act offense.

All such representations and warranties shall be reaffirmed as being true and correct on the Closing Date. Seller shall indemnify, defend, and hold Buyer harmless from and against any and all loss, cost, damage, and expense suffered, sustained, or incurred by Buyer as a result of any breach or untruth of any such representations and warranties. Such representations and warranties and Seller’s indemnity with respect thereto shall survive the Closing.

REPRESENTATIONS AND WARRANTIES OF BUYER. To induce Seller to

execute this Agreement, Buyer represents and warrants to Seller as follows: A. TRUE AND CORRECT: All representations and warranties of Buyer appearing in other Sections of this Agreement are true and correct.

B. AUTHORITY: Buyer has full capacity, right, power, and authority to execute, deliver and perform this Agreement and all documents to be executed by Buyer pursuant hereto, and all required action and approvals therefor have been duly taken and obtained. The individuals signing this Agreement and all other documents executed or to be executed pursuant hereto on behalf of Buyer are and shall be duly authorized to sign the same on Buyer’s behalf and to bind Buyer thereto. This Agreement and all documents to be executed pursuant hereto by Buyer are and shall be binding upon and enforceable against Buyer in accordance with their respective terms.

C. NO MONEY LAUNDERING: None of the funds to be used for payment by Buyer of the Purchase Price will be subject to 18 U.S.C. §§ 1956–1957 (Laundering of Money Instruments); 18 U.S.C. §§ 981– 986 (Federal Asset Forfeiture); 18 U.S.C. § 881 (Drug Property Seizure); Executive Order Number 13224 on Terrorism Financing, effective September 24, 2001; or the United and Strengthening America

by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, H.R. 3162, Public Law 107-56 (the “USA Patriot Act”).

D. NON-FOREIGN INVESTMENT: Buyer is not, and will not become, a person or entity whom U.S. persons are restricted from doing business with under the regulations of the Office of Foreign Asset Control (OFAC) of the Department of Treasury, including those named on OFAC’s Specially Designated Nationals and Blocked Persons list (SDN List), or under any statute, executive order, including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism, the USA Patriot Act, or other governmental action. n

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January/February 2024 49

The Charitable Trust Doctrine: Application to Unrestricted Gifts

A

t common law, assets held by charitable nonprofit organizations are generally understood to be held by such organizations in trust for public benefit. See A. Curreri, Charitable Trusts Definitions and History--Purpose-Beneficiaries--Cy Pres Doctrine, 9 St. John’s L. Rev. 114 (Dec. 1934). This principle, called the “Charitable Trust Doctrine,” is mirrored in the Internal Revenue Code’s prohibition on organizations recognized as public charities for tax purposes from using more than an insubstantial portion of their assets for private benefit. I.R.C. § 1.501(c)(3)-1(c)(i). Although this principle is broadly recognized throughout the United States (see Harold L. Kaplan, Patrick S. Coffey & Rosemary G. Feit, The Charitable Trust Doctrine: Lessons and Aftermath of Banner Health, 23 Am. Bankr. Inst.

J., no. 4, May 2004, at 28), the extent of its reach in shielding assets from the claims of creditors is unclear.

Richard A. Newman is counsel at the Washington, DC, office of ArentFox Schiff LLP.

Two areas associated with the application of the Charitable Trust Doctrine in particular remain unclear: First, does the Charitable Trust Doctrine shield only assets that are restricted (expressly by the donor or by implication) to a narrow or specific charitable purpose of a charitable nonprofit corporation or does it shield unrestricted assets as well; and second, if such shield is narrowly applied to only “restricted” assets, how is such shield to be applied to an asset that derives from both restricted gifts and unrestricted gifts?

In this article, we outline the Charitable Trust Doctrine generally and provide examples of how it raises concerns in certain real-world settings. We then survey case law attempting to apply the Charitable Trust Doctrine in both bankruptcy and nonbankruptcy settings. Finally, we survey case law attempting to apply the Charitable Trust Doctrine to assets that derive from both restricted and unrestricted sources and suggest some (tentative) conclusions and suggestions for practitioners.

Background Although accounting treatment of assets of a charitable nonprofit may not fully mirror state law treatment, most nonprofit executives and board members and most lawyers representing nonprofit borrowers or lenders lending to nonprofits will recognize the formulation applied by the American Institute of Certified Public Accountants (AICPA) to distinguish what were traditionally called “permanently restricted” assets from “unrestricted” or “temporarily restricted” assets. In its Standard ASU 2016-14, the AICPA reformulated those terms to “assets with donor restrictions” and “assets without donor restrictions,” but whatever the nomenclature, the accounting standards distinguish these two classes of assets, as does state law in many cases in the application of the Charitable Trust Doctrine. Although the distinction (between what we will call “restricted” and “unrestricted” assets) is recognized in the accounting standards and in many cases at common law, in practice, particularly in settings where assets were acquired many years ago, applying it can

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Getty Images

By Richard A. Newman

be quite difficult. This difficulty is particularly pronounced in the case of tangible assets because assets acquired with money that was originally either restricted or unrestricted retain (in theory) the character of the money used to acquire such assets (at least for accounting purposes), although in many cases, an asset is acquired with a mix of restricted and unrestricted cash and investments.

The insulation of restricted gifts and assets derived from restricted gifts from the claims of creditors of a charitable nonprofit is broadly recognized in bankruptcy case law. See, e.g., In re Cath. Diocese at Wilmington, Inc., 432 B.R. 135 (Bankr. D. Del. 2010).

Outside of bankruptcy, this protection is also frequently recognized (see, e.g., In re Friends for Long Island’s Heritage, 80 A.D.3d 223 (N.Y. App. Div. 2010)), but, as discussed in Parts II and III, whether this protection extends to unrestricted assets of a charity remains at best unclear and case law in most jurisdictions addressing the Charitable Trust Doctrine is scant. Moreover, there is even less clarity about whether claims of creditors extend to tangible assets originally acquired with a mix of restricted and unrestricted monies, and countervailing public policy considerations cloud the picture further.

Example To help illustrate this dilemma, imagine a charitable nonprofit corporation that has owned and operated a home for the aged (the Home) for over 70 years. The Home was originally built by the nonprofit charity with money it raised through a fund-raising campaign that sought gifts specifically for building the Home (i.e., restricted gifts), although when that campaign fell short of the charity’s goal, it engaged in a more broad solicitation that included appeals for money to operate the Home as well as separate appeals that made no mention of the Home (i.e., unrestricted gifts).

Although in most cases the records would not be clear 70 years later, imagine that the charity has records that suggest that one-half of its fund-raising success was from gifts that specifically mentioned the Home and one-half was from solicitation that did not mention the Home. (And for simplicity sake, assume the charity did not borrow money for the building or renovation of

the Home, and because no rent or investment income was derived before the Home was placed in service, we can ignore these potential sources of money for this illustration as well.) Now consider that a resident of the Home suffers an uninsured or underinsured slip-andfall in the Home and obtains a judgment against the charity. Similarly, consider the situation where the charitable nonprofit seeks to obtain a mortgage loan to renovate the Home. The question that must be answered in both these fact patterns is whether a judgment (whether arising from the slip-and-fall situation or a default under the mortgage loan) can be realized against the Home itself as well as against the unrestricted cash and investments the charity uses to operate the Home or holds in reserves. For the purposes of this example, let’s assume that the charity is not considering a voluntary bankruptcy, but would be rendered insolvent if the judgment were realized against the Home.

Analysis In examining this fact pattern, again we start with the proposition that restricted assets (including assets obtained with unrestricted gifts) of a charity are outside of the reach of creditors. Although this position is not universally recognized (see Restatement (Second) of Trusts § 402(1) cmt. & § 403), the courts in the cases reviewed in this article all presume that, under applicable state law, this liability shield applies. In fact, there is little case law elaborating on the Charitable Trust Doctrine outside of bankruptcy or dissolution settings, but such case law as there is reflects an acknowledgment, expressly or implicitly, of this doctrine. As the court in Salisbury v. Ameritrust (In re Bishop College), 151 B.R. 394 (Bankr. N.D. Tex. 1993), said: “(i)t is a basic tenet of the law of charitable trusts that beneficial charitable [assets] are inalienable.”

Under the Charitable Trust Doctrine, a charity is understood to be acting as the trustee for an imputed charitable trust as to those assets held by it that are subject to the Charitable Trust Doctrine and, consequently, the charity does not have the discretion to use those assets to pay the claims of creditors except in a manner

consistent with the terms of the imputed trust. Restatement (Second) of Trusts § 348 defines a charitable trust as “a fiduciary relationship with respect to property arising as a result of a manifestation of an intention to create it and subjecting the person by whom the property is held to equitable duties to deal with the property for a charitable purpose.” Under § 348(f), restricted gifts to nonprofit charitable corporations are deemed to create a charitable trust, although case law and the Restatement are inconsistent concerning the extent to which this doctrine protects otherwise apparently unrestricted gifts or assets. Evelyn Brody, The Charity in Bankruptcy and Ghosts of Donors Past, Present, and Future, 29 Seton Hall Legis. J. 471, 504 (2005). Section 348 of the Restatement formulates the duty of a charitable corporation as to unrestricted gifts as a duty “not to divert the property to other purposes but to apply it to one or more purposes of which [the nonprofit] is organized”; this ambiguous statement would seem to suggest that unrestricted gifts or assets are shielded in a manner similar to that given the restricted gifts or assets, although the fact that the Restatement treats unrestricted and restricted assets in different sections and with different language may suggest otherwise. As we shall see, the case law in this area is no less confused.

Often courts have found that an otherwise apparently unrestricted gift or asset is protected from claims of creditors when the donor’s gift instrument states a general charitable intent. In some cases, courts have presumed a restriction onto gifts that are not expressly restricted by the donor when (1) there was no express limitation to the contrary made by the donor and (2) paying creditors using unrestricted funds would have rendered the charity insolvent. This mental gymnastics suggests a view that only restricted gifts or assets are insulated by the Charitable Trust Doctrine.

In other cases, courts have found that an otherwise apparently unrestricted gift or asset is not protected from claims of creditors when the donor can be reasonably said to have expected, at the time of naming the charity in the gift instrument, that paying relevant debts of such charity

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while it was still discharging its charitable purpose was in furtherance of the charitable purpose of such beneficiary. Again, these cases suggest a view that only restricted gifts or assets are shielded from creditors’ claims under the Charitable Trust Doctrine.

Under section 541 of the Bankruptcy Code, property of the debtor’s estate is limited to all “legal and equitable interests” of the debtor in property at the commencement of the bankruptcy proceedings. 11 U.S.C. § 541. The Code excludes from the estate of the debtor any property with “a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law.” Id. Since the extent of a debtor’s interest in property is determined by state law, this section of the Bankruptcy Code is understood to recognize the common law Charitable Trust Doctrine in the protection of certain charitable gifts or assets by shielding certain gift of assets of a charitable trust from creditors in a bankruptcy proceeding. Butner v. United States, 440 U.S. 48 (1979). See also Owen v. Bd. of Dir. of the Wash. City Orphan Asylum, 888 A.2d 255, 260 (D.C. 2005) (discussing in dicta the applicability of the Charitable Trust Doctrine to nonprofit corporations).

In applying section 541 and the Charitable Trust Doctrine both in bankruptcy and outside bankruptcy, courts have often interpreted the Charitable Trust Doctrine to impute restriction to otherwise apparently unrestricted donations in certain situations and thereby suggest a view that only restricted gifts or assets are protected. The essence of the reasoning in these cases is an effort by the courts to honor the donor’s intent. Generally, notwithstanding exceptions discussed in the scant case law available, the courts presume that a donor giving for a general charitable purpose intends that the gift or asset be used for objects for which the charitable corporation was formed. The methodology to identify these objects is far from clear. On the one hand, some courts have ruled that satisfying the creditors of a defunct charity cannot be a charitable purpose for which a donor had intended its gift. On the other hand, some courts have determined that creditors

The court assumes that the Charitable Trust Doctrine would shield restricted gifts or assets from claims of creditors, while the law remains unclear as to whether the Charitable Trust Doctrine also shields unrestricted gifts or assets.

are integral to the fulfillment of the charitable mission and a donor fully expects that its gifts will be used to pay related debts. None of these decisions, except for the Blocker court of Texas, cites state statutory law. Blocker v. State of Texas, 718 S.W.2d 409 (Tex. App. 1986), writ refused NRE (Jan. 21, 1987). Instead, they rely on cross-jurisdictional common law judicial rulings, the Restatement (Second) of Trusts, and public policy considerations.

More often than not, the courts explicitly state that there is neither state law nor prior case law within their jurisdiction on point.

In almost all of the cases discussed here, except in Revis v. Ohio Chamber Ballet, 2010-Ohio-2201 (Ohio 2010), the gifts in dispute were bequests to a charity. Although some of the decisions in this area turn on whether a bequest has vested in the charity and thus whether the assets in question belong to the charitable corporation’s estate, the decisions are not consistent on whether the charitable corporation may or must use the bequeathed property that is not expressly limited to a particular, narrow use to pay its creditors. In cases where the courts find that the charitable corporation may not use such gifts or assets to pay its creditors, the cy pres doctrine is often applied. In these cases, the gifts or assets were diverted to another charitable corporation that is able to advance the charitable purpose for which the property was originally given.

To apply cy pres, the courts either specifically recognize a restriction or either impute a restriction or implicitly assume an unrestricted gift or asset is nonetheless

subject to the Charitable Trust Doctrine and, thus, feel bound to discharge the express or imputed trust through diversion to another charity. In all of these cases, it appears that the court assumes that the Charitable Trust Doctrine would shield restricted gifts or assets from claims of creditors, but the law remains unclear as to whether the Charitable Trust Doctrine also shields unrestricted gifts or assets.

All the cases discussed in the second half of this article involve charitable corporations that either filed for liquidation (under Chapter 7) or reorganization (under Chapter 11), or voluntarily dissolved through other arrangements. For dissolution cases, see Blocker v. State of Texas, 718 S.W.2d 409 (Tex. App. 1986), writ refused NRE (Jan. 21, 1987); Montclair Nat’l Bank & Tr. Co. v. Seton Hall Coll. of Med. & Dentistry, 96 N.J. Super.

428, 437–38 (App. Div. 1967), and Revis, 2010-Ohio-2201.

Earlier in this article, we presented an overview of the Charitable Trust Doctrine and presented two fact patterns for readers to consider (a slip-and-fall judgment creditor fact pattern and a mortgage lender judgment creditor situation). Next, we examine case law seeking to apply the Charitable Trust Doctrine. Later, we will examine case law applying the Charitable Trust Doctrine to assets that derive from mixed sources (restricted and unrestricted gifts) and offer some conclusions and thoughts for practitioners.

Cases Insulating Otherwise Apparently Unrestricted Gifts In re Bishop College, 151 B.R. 394 (1993), is a case in point. There, Bishop College, the debtor, which was the beneficiary of two testamentary trusts, ceased to function as an educational institution. It filed a voluntary petition under Chapter 7 for liquidation several years after being named as a beneficiary of the two subject trusts. The trustee of the testamentary trusts refused to make further distributions to the college on the grounds that the charitable intent of the donors could no longer be fulfilled because the college had ceased to function. The Chapter 7 trustee demanded that the corpus and income of the two trusts be turned over to the college’s estate for payment of creditors in accordance with the Bankruptcy Code’s priority scheme.

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The court found that, under Texas law, an unrestricted gift to an educational institution may be presumed to be a charitable gift for educational purposes. In effect, the court presumed a restriction on what otherwise might appear to have been an unrestricted gift. The court rejected the argument that the unrestricted nature of the charitable gift to Bishop College demonstrated a lack of charitable intent. Therefore, it rejected the Chapter 7 trustee’s argument that the donor’s general intent can be met by using the unrestricted gifts to pay the college’s creditors. Instead, the court treated the assets of the trusts as outside of the reach of the college’s creditors, and its reasoning suggests its view that the Charitable Trust Doctrine would not apply to unrestricted gifts or assets.

The In re Bishop College court relied on the Restatement (Second) of Trusts and case law from the bankruptcy courts in Texas and other states, including Nebraska, Ohio, and Pennsylvania. Additionally, the court substantially relied on public policy considerations that it said were state-specific. It explained:

initio. It awarded title and possession of the property to a newly-formed charitable organization impressed with a public charitable trust under the cy pres doctrine.

In its reasoning, the court explained that the actions of the dissolving nonprofit were governed by the Texas Non-Profit Corporation Act (Act). It acknowledged, however, that Texas courts had not yet directly addressed the issue of whether a property transferred unconditionally to a nonprofit corporation is subject to implicit charitable limitations.

In answering the issue, the Texas court relied on reasoning provided by courts in other states, including California and Nebraska. First, the court emphasized that the identity of HCM was permanently and irrevocably established as charitable in its articles of incorporation.

Second, the court applied the Act to the facts of the case. The decision turned on the question of whether the asset application and distribution plan adopted by HCM’s directors was subject to the provisions of section 1396-6.02A(3) of the Act, which read:

State law relating to charitable trusts militates against the termination of the Bishop College Foundations for the payment of [. . . ] creditors. Texas courts hold charitable trusts in such high regard that the rules of construction are more liberal to sustain them, than they would be if the gifts were to private trusts or individuals.

Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, eleemosynary, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, together with any income earned thereon shall be transferred or conveyed to one or more domestic or foreign corporations, societies or organizations engaged in activities substantially similar to those of the dissolving corporation, pursuant to a plan of distribution adopted as provided in this Act.

151 B.R. at 400.

Blocker v. State of Texas, 718 S.W.2d 409 (Tex. App. – Houston 1986), is another case on point. There, a property was transferred unconditionally to the Houston Conservatory of Music (HCM), a nonprofit charitable corporation. The purpose of HCM, as stated in its articles of incorporation, was to “be a non-profit operating strictly for the purpose of teaching the Youth of this land music and its allied arts.” Id. at 411. Decades later, HCM’s board of directors decided to dissolve HCM, pay the liabilities of the corporation, and distribute any remaining assets back to the estate of the original donor.

The court of appeals declared the deed, which conveyed the property of HCM to the estate of the original donor, void ab

Blocker, 718 S.W.2d at 412. The court, relying on case law from other states and the Act, concluded that a property transferred unconditionally to a public charity was subject to implicit limitations defined by the charity’s organizational purpose. The restriction was presumed by the court partially because the gift transfer instrument did not state an express limitation to the contrary. The

court underscored that “[n]o technical words or further manifestations of general charitable intent [were] necessary in order to create such a trust.” Id. at 415.

Thus, acceptance of such donated assets established an imputed charitable trust as if the assets were subject to an express limitation mandating that they were to be held solely for the declared charitable purposes. Therefore, the cy pres doctrine applied and the subject assets were not available for use other than by another similar charity. Although this decision did not address claims of creditors, it does suggest an expansive application of the implied restriction approach and recognized that restricted assets are outside of the reach of creditors. Again, the reasoning of the court suggests that only restricted assets of a charity are outside the reach of creditors.

In re Estate of Kraetzer, 119 Misc. 2d 436, 437–41 (N.Y. Sur. Ct. 1983), 462 N.Y.S.2d 1009, is another case on point.

There, a hospital that was named as one of the residual beneficiaries in a will ceased its operations and engaged in a Chapter 11 reorganization bankruptcy proceeding before receipt of the subject bequest. The testator specified that the gift to the hospital was “to its sole use, benefit and behoof, absolutely and forever.” Id. at 437. The hospital sought to retain the subject funds as part of its plan of reorganization. The court held that “whatever its inherent merits, the courts have uniformly held that the intention of a testator in making a general gift to a charitable corporation was the furtherance of the charitable purpose for which the entity was formed as set forth in its charter.” Id. at 439. In the case of hospitals, such purpose is “the actual and continued provision of acute patient care services rather than the satisfaction of creditors’ claims.” Id. Accordingly, the court, having imputed a restriction to the gift, declined to permit the subject assets to be used to pay the claims of creditors. The court explained that the wording of the donor’s gift did not compel a different conclusion. The wording constituted “a mere draftsman’s mannerism rather than a broad grant of authority to [the hospital] to use the fund for a purpose other than the continued operation of its facilities

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for the care of ill and injured persons.” Id. at 440. Hence, the court decided that the gift intended for the hospital should be applied under cy pres to a similar charitable use because of the cessation of the intended charitable operations by the original beneficiary, but again here with the result that the claims of creditors were not satisfied with what otherwise may have appeared to be unrestricted assets of the charity. And again, the reasoning of the court suggests that only restricted assets are shielded in this manner.

To the same effect, see also In re Forum Health, 444 B.R. 848, 863 (Bankr. N.D. Ohio 2011), denying unsecured creditors’ objections to a nonprofit board member’s failing to use unrestricted funds to pay unsecured creditors.

Cases Permitting Otherwise Apparently Unrestricted Gifts to Be Used to Pay Debts In some cases, the court concludes, based on policy and not necessarily any specific facts, that a donor fully expects that its general (unrestricted) donation will be used to pay debts and expenses a charity incurs in discharging its mission. Because discharging its mission in furtherance of its charitable purpose involves incurring debt, the relevant debts and expenses are said by these courts to be in furtherance of the charity’s charitable purpose. Thus, absent any express indication by the donor to the contrary, the donor’s general intent may be found, by implication, to include paying debts incurred while the charitable corporation was actively pursuing the charitable purpose for which it was created. Here, too, by looking to the intent of the donor, the courts seem to suggest that only restricted assets are shielded, even if, in practice, their reasoning requires that restrictions are read in such a way as to make the subject asset available to creditors In In re Boston Regional Medical Center, Inc., 298 B.R. 1, 28–29 (Bankr. D. Mass. 2003), is a case on point. There, the bankruptcy court considered whether payment of a charity’s creditors using unrestricted funds fell within the charitable purpose of the organization. The court addressed this question in the context of a debtor charity that had permanently

discontinued its operations and entered liquidation proceedings. In that setting, the court found that the charity remained qualified to receive a bequest intended for charitable purposes where the bequest would be used to pay debts incurred prior to the liquidation and in furtherance of the corporation’s charitable mission.

Boston Regional Medical Center, Inc. (BRMC) was a debtor and a beneficiary to a one-third interest in the residue of three testamentary trusts. Almost a year after being named as a beneficiary, BRMC filed a petition under Chapter 11 of the Bankruptcy Code and discontinued hospital operations within a few days thereafter. BRMC sought an order directing the trustees of the testamentary trusts to turn over to it the funds representing BRMC’s one-third interest in each trust. The two other residuary beneficiaries of the testamentary trusts opposed the request.

They argued that BRMC, by virtue of its financial difficulties and ultimate discontinuance of hospital operations, had, before the date of distribution, become unable to use the funds for a charitable purpose. One of the beneficiaries asked that the testamentary provisions of the trusts be reformed to require that the bequest to BRMC be used “to provide a bed for indigent patients” as was required by the will that established the three testamentary trusts. They further sought a court decision that BRMC may not receive the bequest as so modified because it could no longer provide a bed for indigent patients.

The court relied on public policy considerations and case law from other jurisdictions in determining that paying the hospital’s creditors fell within BRMC’s charitable purpose and hence that the subject gift was available to pay claims of creditors. The court explained that “payment of creditors is essential and integral to the carrying on of the charitable mission of the hospital [because] it is the creditors who carry out the charitable work.” Id. at 28. If it were not for the employees, suppliers, lenders, and others supporting and facilitating the delivery of the healthcare services, the court asserted, a hospital, even a not-for-profit one, simply would not exist. Therefore, a donor who gives money to a hospital

understands fully well that the donee will not apply the donated funds directly “to the patients’ wounds.” Id. Rather, the hospital will use the money to pay the employees and other creditors through whom it provides medical care to its patients. The court highlighted that if payment of creditors were inconsistent with the charitable mission of a charitable corporation, then such corporations would have to pay for goods and services in advance, and they could never use debt financing. In a credit economy, such a situation would restrict charities in the performance of their charitable functions.

The timing of the incurrence of debt was irrelevant to the determination of the court. The court underscored that the debt in question was incurred for BRMC’s operation and, hence, they served the charitable mission. The court clarified that In re Bishop College (discussed above) and Estate of Kraetzer (discussed above) failed to explain (1) how a charitable organization can perform its charitable purpose without paying its employees, lenders, suppliers, etc.; (2) how a charitable hospital might use its donations if not to pay its employees, lenders, suppliers, etc.; and (3) why payment in arrears is materially different (for purposes of determining charitable purpose) from advance or contemporaneous payment. The Boston Regional court explained that in both of those prior cases, the courts simply assumed without a proper consideration that payment of a charity’s creditors is inconsistent with and beyond its charitable purpose. Thus, the Boston Regional court ruled that the charitable purpose is furthered by payment of debts and expenses incurred in advancing an organization’s charitable purpose because, it felt, a donor fully expects that this is the purpose to which a donation will be put. Critically, however, the subject gift in this case was not a restricted gift. Thus, this case can be reconciled with the prior cited cases insofar as all appear to recognize, expressly or implicitly, that although restricted assets are insulated from creditors’ claims under the Charitable Trust Doctrine, unrestricted assets are not.

Another similar case is Montclair National Bank & Trust Co. v. Seton Hall College of Medicine & Dentistry, 96 N.J. Super.

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428, 437–38 (App. Div. 1967). There, the Superior Court of New Jersey, Appellate Division, considered the question of whether Seton Medical was entitled to its residuary share of the estate given with no restrictions by a testator.

Seton Medical, as one beneficiary of a testator’s estate, ceased operation through voluntary dissolution two years after being named a beneficiary and before gift distribution. The trial court found that the intention of the testator would be most nearly approximated if another medical college became the cy pres successor beneficiary of the residuary portion in question. The appellate court disagreed.

The gift was generally intended to promote medical education. Nowhere was it alleged that Seton Medical’s debts were not contracted as the result of services and expenses related to that end. Thus, the court found that the application of the funds towards the diminution of Seton Medical’s debts would have the effect of furthering the testator’s intended charitable and testamentary purpose, i.e., the payment of expenses incurred in teaching medicine and dentistry. The court emphasized that the medical school’s debts, which were contracted while the school was actively engaged in teaching medicine, were a proper purpose for which funds could be used. This conclusion stood even though at the time of the creditors’ payment the school was no longer engaged in teaching medicine.

Here, too, we see unrestricted gifts falling outside of the liability shield of the Charitable Trust Doctrine.

Revis v. Ohio Chamber Ballet, 2010 Ohio 2201 (Ohio Ct. App. 2010), 929 N.E.2d 1068, further advances the discussion started in Boston Regional and Montclair National Bank and Trust. There, the Ohio Chamber Ballet (OCB), which had ceased its activities through dissolution, sought disbursement of donated funds to pay off its debts. The court distinguished the facts and, thus, the courts’ decisions in Boston Regional and Montclair National Bank and Trust from the case at hand. Unlike in the earlier two cases where the funds were not expressly restricted gifts, here, the endowments were restricted in perpetuity. The grant agreement in this case clearly stated that

the funds were to be disbursed to OCB “only if [OCB] continue[d] to engage in charitable and educational activities.”

Id. at P64. The court in this case emphasized that there is no relevant authority that supported OCB’s proposition that it was engaging in charitable, educational, or cultural activities by paying off its debt. The court in this case highlighted that in addition to being unrestricted, the bequests in Boston Regional and Montclair National Bank and Trust had vested in their respective charitable beneficiaries because these beneficiaries were actively pursuing their charitable purpose at the time of the testators’ death. In contrast, OCB had ceased operations almost three years before the commencement of the lawsuit. Thus, although the court declined to allow restricted charitable gifts to be used to satisfy creditors’ claims on the basis of a vesting argument, the analysis provided by the Revis court suggests that the court might have allowed unrestricted gifts or assets to be used for payment of debts in other settings, although clearly relying on the Charitable Trust Doctrine to shield restricted gifts.

In re Winsted Memorial Hosp., 249 B.R. 588, 594 (Bankr. D. Conn. 2000), is another case on point. There, the state attorney general moved to compel the trustee in bankruptcy of a charity to abandon charitable gifts to a Chapter 7 debtor-hospital in liquidation. The attorney general argued that the debtor had closed its doors and was no longer providing charitable services that the donors meant to support. The case hinged on the question of whether gifts vested in a debtor prior to the bankruptcy filing may be used to pay debts. The court decided that such gifts were generally included in the “property of the estate,” subject only to the restriction that “they be applied to payment of debts incurred for the hospital’s general charitable purposes while it was operating....” Id. at 596. To determine whether the use of gifts to pay debts is proper, the court suggested we pose the question: Is the proposed use proper had the bankruptcy not occurred?

The court explained that the Bishop College court failed to address the question of “whether the intended use of the gifts was within the college’s general charitable

purposes.” Id. at 594. Rather, the Bishop College decision was limited to rejecting the argument that a mere continued corporate existence is sufficient to entitle a bankrupt charity to the gifted assets. The Winsted court agreed with and elaborated on that rejection. More generally, the Winsted court concluded that a charitable organization that remained in existence may continue to receive and use charitable gifts, provided it applies such gifts in accordance with the intent of the donor, and the intent of the donor can include payment of debts incurred while the charity was operating prior to liquidation.

Here, too, the court allows unrestricted gifts or assets to be used to satisfy creditor’s claims, suggesting a view that the Charitable Trust Doctrine does not apply to such gifts or assets.

In this article, we provided an overview of the Charitable Trust Doctrine and two fact patterns in which it may arise (a slip-and-fall judgment creditor of a charity and a mortgage lender judgment creditor of a charity) and developed case law attempting to apply the Charitable Trust Doctrine to specific fact patterns both in bankruptcy and outside bankruptcy and concluded that the pattern these cases suggest is a view that the Charitable Trust Doctrine shields only restricted assets and gifts, albeit that courts may seek to find restrictions even in the absence of clear language in the instrument of gift in order to shield assets from claims. In this final part, we examine the application of the Charitable Trust Doctrine to mixed assets (i.e., assets derived from both restricted gifts and unrestricted gifts) and offer some conclusions and thoughts for practitioners.

Division of Assets Funded by Restricted and Unrestricted Assets Where restricted and unrestricted gifts have been commingled, the issue of the application of the Charitable Trust Doctrine to the protection of such assets by a nonprofit from claims of creditors is particularly difficult. Of course, this is only of consequence in settings in which the court is not willing to protect unrestricted assets by application of the Charitable Trust Doctrine

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to unrestricted gifts, but, as noted above, case law does suggest that only restricted assets are so protected.

In re Parkview Hospital, 211 B.R. 619 (Bankr. N.D. Ohio 1997), is a case in point.

There, the Ohio bankruptcy court considered whether a fund that consisted of commingled restricted and unrestricted gifts was a charitable trust excluded from the property of the estate and protected from creditors in a Chapter 11 reorganization bankruptcy proceeding. In doing so, the court relied on Ohio statutes and case law, as well as the Restatement (Second) of Trusts.

The court first considered whether there was a manifestation of intent by the donors to establish a charitable trust.

Because of a lack of clear recordkeeping, the court was unable to differentiate the gifts donated with the specific intent of establishing a charitable trust (i.e., restricted gifts) and other gifts donated (i.e., unrestricted gifts). Despite this, the court decided that there was a general understanding between the donors and the nonprofit corporation to use the funds for a charitable purpose based on evidence of brochures used to solicit at least some of the gifts in the fund that used the term “restricted fund.” Using this evidence, the court inferred that the intention of certain donors was to limit their gifts for a charitable purpose, and this was sufficient to create an imputed charitable trust as to those gifts (i.e., restricted by implication).

Because unrestricted gifts were also placed in the fund with no means of separating the two types of donations, the court then considered whether both types of gifts in the fund were protected by “charitable trust” status. There, the court relied on Ohio case law and statutes finding that Ohio nonprofit corporations had statutory authority to donate restricted gifts and could therefore make these donations to the funds for which they act as trustees. The court concluded that the inclusion of the unrestricted gifts in the fund simply operated as a restricted donation by the nonprofit corporation to the imputed charitable trust, treating the fund as if it were a separate trust entity. Thus, because all of the monies at issue were placed in the fund by either

the nonprofit itself or by third-party donors with an intent to adhere to the restrictions imposed on the balance of the monies in the fund by other donors, the requisite intent to maintain a charitable trust was shown.

Throughout the opinion, the court stresses the significance of protecting charitable assets. First, in determining whether the charitable trust was created, it looked to several previous Ohio decisions emphasizing the public interest in supporting charities and the need to offer a “liberal and favorable consideration” when determining whether a charitable trust exists. Id. at 631-632. The court further stresses this point when responding to an allegation of improper use of funds within the fund, stating, “even were some improper use of funds to be shown, this Court would be reluctant to abrogate the intent of donors (who understood that this Fund was restricted for a charitable purpose) due only to the improprieties of the Fund’s trustees.” Id. at 638.

Although the court relied on state law and precedent to come to its decision, the decision indicates the court’s unwillingness to make the fund available to creditors, as doing so would essentially deprive the nonprofit hospital of a large sum of charitable assets and the donors of their charitable intents. This implication is not explicit, but this case seems to provide a good example of how a court may protect unrestricted gifts that are commingled with restricted assets of the organization, albeit through what might appear to be the tortured logic of converting what might otherwise have been seen as unrestricted assets into restricted assets by imputing an intent to create a restricted gift by the mere act of comingled investing.

In re Catholic Diocese of Wilmington, Inc., 432 B.R. 135 (Bankr. D. Del. 2010), dealt with the division of assets held in a pooled investment account (PIA) between the Catholic Diocese of Wilmington and several of its parish affiliates.

The Diocese, the debtor in a Chapter 11 bankruptcy reorganization proceeding, held assets in the PIA that were the debtor’s property. The additional funds in the PIA belonging to parish affiliates were not considered property of the debtor’s estate

and were protected from the creditors of the debtor as the previous court decided that the Diocese had only acted as the trustee of these funds.

To trace the commingled funds within the PIA, the court adopted the lowest intermediate balance test (LIBT).

Although it had not been adopted in the Third Circuit, the court recognized the use of this rule as a longstanding principle of trust law as well as a rule routinely applied by federal courts throughout the country. Under this rule: if the amount on deposit in the commingled fund has at all times equaled or exceeded the amount of the trust, the trust’s funds will be returned in their full amount.

Conversely, if the commingled fund has been depleted entirely, the trust is considered lost.

Finally, if the commingled fund has been reduced “below the level of the trust fund but not depleted, the claimant is entitled to the lowest intermediate balance in the account.”

Id. at 151 (citing In re Dameron, 155 F.3d 718, 724 (4th Cir. 1998) (internal citations omitted)). In applying the LIBT to the case at hand, the court was able to trace only the funds of one parish of the five participating in the PIA based on the evidence and records provided. Although the court was able to shield those funds from creditors of the debtor in bankruptcy, it held that the remaining parishes had failed to meet the burden of demonstrating the traceability of funds and thus any assets as to which they might have a claim were included in the property of the debtor’s estate and available to satisfy claims of creditors.

In re Marve, 484 B.R. 735 (Bankr. N.D. Ind. 2013), presents another approach to dividing commingled funds in a bankruptcy proceeding. There, the court sought to distinguish the exempt and nonexempt funds held in the debtor’s account by adopting and applying the “first-in, first-out method.” Under this method, the court traces the exempt funds by looking at the account balance

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immediately preceding the deposit of the exempt funds. Then, the court will assume any funds in the account before such deposit had been used first when looking at the account balance at the time of the bankruptcy proceeding.

The court chose to adopt this method because it believed it “mirror[ed] reality” and is the best of the available methods, including the LIBT. While the LIBT is applied to preserve the maximum amount of exempt funds, that method does not always reflect the actual practices of deposits and withdrawals of the debtor. Rather, it would provide the most protection possible to the debtor’s exempt funds in the trust. In choosing to apply the first-in, first-out method, the court reasoned that it was most appropriate, as it would rely solely on the timing of deposits and withdrawals, which in some cases will result in preserving funds and in other cases will not.

Although this case deals with the commingling of personal assets and an IRS earned income credit, which is exempt from inclusion in the property of the estate, it may still be applicable to a case involving restricted and unrestricted assets. In applying this method, the court in Marve relied solely on case law from varying jurisdictions in which courts were tasked with separating exempted assets from assets that were property of the estate. The court quoted a previous decision using the method, writing, “exemptions are to be construed liberally in favor of debtors,” which seems to suggest this method can be applied to any exemption under section 541—including the exemption of restricted funds. Id. at 739. The court’s decision to apply this test to an exemption that plays a similar role to charitable trusts may suggest that such a method can be applied to our current situation.

In fact, the court explicitly recognized and discussed the significance of exemptions such as the earned income credit when considering whether to apply the LIBT, writing that it “to some extent, alleviates the need for other social welfare payments to be made by the federal government, state and local governments.”

Id. at 740. The reasoning and policy considered by the court resemble those in

support of the Charitable Trust Doctrine and the enforcement of exemptions on restricted charitable assets that makes it more likely that a similar approach could be taken in a case involving a charitable trust holding a restricted gift or asset.

Because this is a personal bankruptcy case and does involve a charitable trust, the court may have been willing to apply a test that provided more protection to the debtor’s assets, but the decision suggests that a charitable trust may be entitled to a division of assets that is more favorable to protecting the restricted charitable donations and assets—such as the LIBT. Conclusion From the muddle of case law described above, one can reach certain conclusions: (i) generally, courts recognize that the Charitable Trust Doctrine shields assets of a nonprofit charity that are donor restricted to a narrowly worded purpose; (ii) sometimes courts will impute a restriction on otherwise apparently unrestricted assets or on assets that derive from less than narrowly worded instruments of gift, particularly if doing so will allow a nonprofit charity to avoid insolvency or continue to operate; (iii) it does not appear that generally courts will extend this shield to unrestricted gift assets; and (iv) there is no meaningfully consistent precedent on the application of the shield that derives from the Charitable Trust Doctrine to assets that include or derive from both unrestricted and restricted sources.

Applying the scant case law that there is to the nursing home example set out above (and assuming for this purpose that the Home is located in a jurisdiction that has not directly addressed the issues), it is clear that neither the slip-and-fall judgment creditor nor a mortgage lender has a clear path to realizing a judgment on the assets of the charity that operates the Home. Most importantly, because realizing a judgment on the Home itself (and possibly on its reserves as well) would render the charity insolvent and incapable of continuing its exempt purpose, there is substantial authority that suggests that its assets, including the Home itself, would be shielded under

the Charitable Trust Doctrine even if it required the court to impute restrictions on otherwise apparently unrestricted assets. Further, given that the Home property was acquired with a mix of expressly restricted gifts and gifts that may or may not have a limitation on use imputed to them, how the courts would enforce such a judgment lien on the Home itself is unclear. To force the sale of the Home to generate funds (if any portion of the funds used to acquire the Home was otherwise deemed available to satisfy claims of creditors) would frustrate the donative intent of those donors who did expressly impose restrictions and would render the charity insolvent. Thus, given the great deference that the majority of courts give to the Charitable Trust Doctrine, and given that the judgment lien in the slip-and-fall fact pattern does not arise out of the debt reasonably foreseeable to have been incurred for the operation of the Home, the likelihood of recovery by the slip-and-fall creditor against the Home itself seems remote. In the case of a claim of a mortgage lender, however, and in particular if the charity were not faced with bankruptcy if the claim was paid, the outcome is less clear. The lack of clarity in the law on these points invites legislative action, and although some states have adopted statutes shielding nonprofit assets from claims of creditors where insurance proceeds are available (see, e.g., D.C. Code § 29-406.91; Md. Code Ann., Cts. & Jud. Proc. § 5-406), these statutes remain largely untested and fail to address whether unrestricted assets of a charity are available to satisfy contractual claims and how claims are to be satisfied where the available assets derive from a mix of restricted and unrestricted sources.

Further, the lack of clarity in this area suggests that lawyers representing charitable nonprofit corporations in mortgage loan transactions may wish to consider whether special qualifications to standard enforceability opinions are warranted, and lawyers representing lenders in such fact patterns may also wish to consider whether such qualifications render an enforceability opinion in this setting functionally moot. n

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TECHNOLOGY P R O B AT E The Intersection of Biometric Information and Estate Planning Biometric information has become widely used and accepted in many aspects of our lives. Using biometric information is convenient and purportedly secure, so individuals will often willingly turn over their unique biometric information without considering the potential consequences of data breaches. Facial scans and fingerprints have become the primary method to unlock phones, tablets, computers, and apps. Wearables record our heart rates every second of the day to determine our steps, activity, and general overall health, and in the process, amass and transmit massive amounts of medical data to third parties.

Apple’s latest software updates in iOS 17 introduced the use of Personal Voice, an accessibility program designed to afford those who may lose the ability to speak in the future a way to talk again through their AI-generated voice. After only fifteen minutes of a user reading 150 text prompts, the software records the user’s voice and creates a mechanism to mimic the user’s voice. Simply type in a phrase, and Personal Voice will recite the phrase in the user’s voice.

Although Personal Voice is not yet a spot-on replica of a user’s voice, the potential for mimicking a user’s AI-generated voice is just around the corner.

Amazon recently announced its plans to allow Whole Foods customers to pay at all their stores by the year’s end by simply waving their hands. A customer’s palm print will be linked to

Technology—Probate Editor: Ross E. Bruch, Brown Brothers Harriman & Co., One Logan Square,14th Floor, Philadelphia PA 19103, ross.bruch@bbh.com. Contributing Author: Justin Brown, Ballard Spahr, 1735 Market Street, 51st Floor, Philadelphia, PA 19103.

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

the customer’s credit card so that customers will no longer need their wallets or phones to pay for groceries.

Apple’s Vision Pro will soon enable users wearing the device during a FaceTime call to reflect a digital representation of themselves, called a Persona, based on their biometrics and Apple’s machine learning. The person on the other side of a FaceTime call will not actually see the person— instead, they will see the person’s digital Persona, which is expected to look identical to the person.

“Biometric information” is any information, regardless of how it is captured, converted, stored, or shared, based on an individual’s biometric identifiers used to identify an individual. A “biometric identifier” is a unique biological trait that may identify an individual, such as a retina or iris scan, fingerprint, voiceprint, or scan of hand or face geometry.

Integrating biometrics into our lives is more convenient and secure than alphanumeric passwords. Alphanumeric passwords are often forgotten and easily hacked, and individuals, contrary to the advice of cyber security experts, recycle their passwords, thereby making their digital lives more vulnerable to cyber-attacks. Using

biometrics purports to solve this problem because instead of using vulnerable passwords, we can now use our unique biometric identifiers, which are more difficult to hack and impossible to forget, as the secure gatekeepers to our digital lives. But unlike alphanumeric passwords, social security numbers, or phone numbers, biometric information cannot be changed if stolen or compromised. Once biometric data is stolen or compromised, the individual is forever compromised. You can’t exactly change your face if your facial biometric identifiers are stolen and floating around the dark web.

Because of the uniqueness of biometric information, the commoditization of biometric information has unsurprisingly expanded in the past few years.

For example, facial recognition software can map out an individual’s facial biometric identifiers and create a database of biometric information to be sold to law enforcement so that law enforcement may better identify individuals in crowds. Technology exists to scour pictures of individuals online and scrub their facial biometric information so that it may be collected and commoditized. This technology could be a valuable tool for law enforcement, but imagine the problems that could arise when biometric information is collected and used without an individual’s knowledge for nefarious purposes. Consider the potential problems when the law enforcement biometrics database is hacked and all biometric information is in the public domain. Or consider a parent’s online posting of a picture of a minor child whose biometric identifiers are scrubbed and forever in the public domain.

Some states have enacted laws to safeguard biometric information and

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TECHNOLOGY P R O B AT E

biometric identifiers. Illinois, one of the leaders in biometric privacy, enacted the Illinois Biometric Information Privacy Act (BIPA) in 2008 and has specifically created a private right of action when an individual’s biometric information is improperly collected, captured, or purchased or if such information is improperly disclosed, redisclosed, or disseminated.

Earlier this year, the Illinois Supreme Court held that every improper collection, capture, purchase, disclosure, redisclosure, or dissemination of an individual’s biometric information is an actionable BIPA violation, potentially subjecting BIPA violators to significant damages. BIPA is very protective of biometric data in Illinois, but not all states have biometric privacy laws, not all states have biometric privacy laws as strict as BIPA, and no federal biometric privacy law exists at the time of this writing.

With the rise of biometrics, estate planners need to be increasingly aware of biometric information in our everyday lives because the issues surrounding biometrics affect everyone, including our clients and ourselves.

Suppose biometric information is digitally stored during a client’s lifetime.

In that case, the client should know who is storing the biometric information, what security protocols are used to safeguard the client’s biometric data from a security breach, what the storing party may or may not do with the stored information, and what happens to the biometric information if the storing party goes out of business.

Clients should be cautious in turning over their biometric information out of convenience without considering the consequences of inadequate and improper storage.

For attorneys who serve as trustees of their clients’ trusts that may hold cryptocurrency, many cryptocurrency custodians use biometrics for their security protocols and require verification of the trustee’s biometric information to engage in a transaction.

Attorneys must, therefore, ask the same questions as their clients when their biometric information is used because

it is equally subject to the risks and consequences of faulty storage or a data breach.

Digitally stored biometric information appears to fall within the definition of a “digital asset” under the Revised Uniform Fiduciary Access to Digital Asset Act. Estate planners should, therefore, be considering whether biometric information may be transferred during a client’s life or at a client’s death, who may access the biometric information, and the proper mechanism for transferring biometric information.

The data files behind Apple’s Personal Voice, for example, may be stored and transferred so that a decedent’s voice may be used during life or after death.

Estate planners should be conversing with their clients about who should and could have access to digitally stored biometric information during life or after death, how their biometric information may be safeguarded, and whether their biometric information should be destroyed after death to avoid misusing their biometric information. Estates of celebrities could even potentially use a celebrity’s biometric information postmortem to add value to the celebrity’s estate.

Apple’s Persona also creates interesting estate planning issues concerning the execution of electronic estate planning documents. Some jurisdictions permit the electronic execution of a will

through Facetime with witnesses. But if witnesses see the Persona of the testator rather than the actual testator, are the witnesses actually witnessing the testator sign his will? As the use of AI with biometrics improves, there will be real questions as to whether what we see on video is “real” or if it is an AI-generated video or image extrapolated from biometric information.

In an era of digital evolution, the rise of biometric technology brings forth a dual-edged sword of immense convenience and uncharted risks. Although it promises a world where forgetting passwords becomes a tale of yesteryears and individual authentication reaches unparalleled precision, it raises profound questions about the sanctity of our most personal information.

The irrevocable nature of biometric data, once stolen or misused, underscores the urgency for robust security measures and comprehensive legislative safeguards. Estate planners, now at the nexus of these technological shifts, have an imperative to adapt and provide informed guidance to their clients.

As we navigate this new frontier of biometrics, balancing innovation with the intrinsic value of personal data security becomes paramount. The decisions made today will indubitably set a precedent for the future trajectory of biometric integration, demanding both vigilance and foresight. n

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LAND USE U P D AT E Zoning for Mixed-Use Development Mixed-use development combines retail, office, and residential use and is an element of contemporary planning. It provides a good range of housing choices that increase affordability and equity and mitigate environmental problems by reducing motor vehicle use. It also forms part of a strategy for sustainable development and good urban form with the objectives of attaining economic vitality, social equity, and environmental quality.

Mixed-use is a significant form of land development that upends conventional zoning. This Update discusses the obstacles that conventional zoning creates for mixed-use development and how it can be changed to eliminate zoning problems. A wide array of zoning alternatives is available, which adapt existing zoning strategies, but there is limited understanding of how they function and their advantages and disadvantages.

The Zoning Challenge Zoning, as originally conceived, did not allow mixed-use development. Its purpose was to separate land uses that might harm each other into different zoning districts. Zoning ordinances implement this purpose under a model Standard State Zoning Enabling Act, published by the US Department of Commerce in 1926, which most states adopted.

The Standard Act delegates zoning authority to local governments. It authorizes them to divide municipalities into zoning districts to “carry out the purposes of this act” and regulate land use within such districts. The Act does not provide Land Use Update Editor: Daniel R. Mandelker, Stamper Professor of Law Emeritus, Washington University School of Law, St. Louis, Missouri.

statutory direction for creating zoning districts nor for the types of land uses that can be included. Standard practice is to create separate districts for residential, commercial, and industrial uses, an approach that does not allow mixed-use development, which an early US Supreme Court case upheld. Village of Euclid v.

Ambler Realty Co., 272 U.S. 365 (1926).

This zoning practice is based on an implicit land-use pyramid with residential use at the top of the pyramid as the most desirable land use, followed by commercial and industrial uses as less desirable.

Noncumulative zoning is another common zoning practice not required by the Standard Act that limits each zoning district to one use and does not allow different uses to mix in the same zoning district. Cumulative zoning is an alternative that allows mixed-use by permitting more than one use in a zoning district.

Residential uses, for example, are allowed in a district zoned for commercial uses.

Cumulative zoning can allow mixeduse development, but it is a clumsy fix because it does not control the type of mixed-use development that can be built.

The Standard Act also includes a statutory uniformity clause that could prevent the mixing of uses within zoning districts.

This clause provides that “[a]ll such regulations shall be uniform for each class or kind of buildings throughout each district,” but it has not proved troublesome.

Most courts have adopted a reasonableness exception, which validates mixed-use zoning notwithstanding the uniformity clause when the mix of uses is reasonable.

Zoning Issues Mixed-use development raises several zoning issues. One issue is that local governments must consider how the

market will respond to a mixed-use zoning ordinance. The ordinance can permit mixed-use development, but it will be built only if the market responds to what the ordinance permits. Gaps and vacancies in a development would occur, for example, if the space zoned for retail use is not completed because market demand is not there. Zoning for mixed-use development should be preceded by a detailed market study so that it can be written to meet market demand.

A zoning ordinance can authorize mixed-use development through “byright” zoning that permits mixed-use as a matter of right or through zoning that requires the approval of mixed-use development in a discretionary review process.

By-right zoning provides opportunities for mixed-use development without going through discretionary review, which provides certainty for developers and avoids the problems that can occur in a discretionary review process, such as higher costs and delays. The difficulty is that byright zoning can be inflexible and concede too much control over development mix and character to developers.

Managing Design Design is the catalyst that brings planned mixed-use development to life. Managing design requires design controls that can shape development character. They can be adopted independently or included in the zoning ordinance. Design standards are one alternative. They are mandatory, objective, and quantitative, similar to site development and density requirements in zoning ordinances. Design standards can include fixed rules for design characteristics, such as building form and mass, but may limit design opportunities if they are too inflexible.

Published in Probate & Property, Volume 38, No 1 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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LAND USE U P D AT E

Design guidelines are another alternative that can be objective or subjective.

Objective design guidelines control mandatory design features, such as building mass and form. They define design clearly but may be inflexible. Subjective design guidelines, such as a walkability requirement, are indeterminate, qualitative, and not measurable. They are administered through the normal development review process or by a board such as an architectural review board that reviews project designs to determine whether they comply with design guidelines. Problems may occur if ambiguous guidelines allow arbitrary decision-making, and the review and approval process may increase costs and cause delays if not properly managed.

The retail space design is an example of what design guidelines should include, as the proper design and configuration of retail space can determine whether a mixed-use development will succeed.

Retail space must be compatible with a mix of complementary uses, vibrant and pedestrian-friendly, and experiencedriven with active ground floor space.

Design guidelines can address these issues with design criteria for site design, walkability, architectural expression, scale, physical form, and building mass.

For example, Castle Pines, Colorado, has design guidelines for mixed-use districts. City of Castle Pines, Colo., MixedUse Design Guidelines (2018). They include core design principles such as community character, balance, placemaking, pedestrian activity, and sustainability.

They also include additional design details for each of the core design principles. Walkability is an example. It is an essential requirement for mixed-use development, and a design guideline for connectivity requires “providing pedestrian easements along building frontages where appropriate to provide a walkable network between building entries, public spaces, and adjacent buildings or developments.”

Zoning Alternatives Zoning for Unplanned Mixed-Use Development. Several developers create this type of mixed-use development through separate, unrelated actions. It requires zoning by right that details uses, densities, and

other land-use requirements for mixeduse development. Scale is important, and the zoning ordinance can include by-right mixed-use districts organized by size, such as a small neighborhood, a medium community, a regional development, and a major redevelopment mixed-use district.

See Bloomington, Indiana, Unified Development Ordinance Ch. 20.04 (2021).

Design controls can be combined with zoning for unplanned mixed-use development. For example, Montgomery County, Pennsylvania, has a model New Town Mixed Use District. Zoning requirements include land use, land-use mix, and dimensional standards. The design concept states it “is designed for places where compact, walkable, livable, and attractive development is appropriate.” The district defines key design elements, which include a wide variety and diverse mix of uses, pedestrian-friendly building design, unobtrusive parking, and appropriately scaled height. Design standards include general layout, building design, parking, and pedestrian design.

Design standards adopted from formbased codes are another possibility. They are a zoning innovation that expands the typical zoning ordinance with by-right design standards that include the relationship between building facades and the public realm, the form and mass of buildings in relation to one another, and the scale and types of streets and blocks.

Mixed-use zoning can include design standards from form-based codes that can provide more control over the design of mixed-use developments.

A zoning strategy known as a floating zone can provide more flexibility for unplanned mixed-use zoning. A floating zone is a zoning district included in the text of the zoning ordinance but not mapped until a developer applies for the district and the local government maps it.

Letting the zoning district float until it is mapped allows the local government to decide where it wants mixed-use development to be located and to include customized requirements that determine what kind of mixed-use development will be built.

Zoning for Planned Mixed-Use Development. This type of development requires detailed design controls and zoning

that define critical project elements. The Dublin, Ohio, Bridge Street District is an example. It is a form-based code that implements the Bridge Street District Area Plan with detailed design guidelines for a densely developed, walkable, mixed-use planned development in a 1000-acre historic center. City of Dublin, Ohio, Code of Ordinances § 153.057–.066.

Planned Unit Development. A planned unit development (PUD), or planned community, is a land-use development for which a local government approves a development plan that controls the development of the PUD. The ordinance specifies what kind of PUDs the local government will approve. It should also define what must be included in the development plan, such as the objectives and character of the development, residential and nonresidential development standards, guidelines for walkability, public space, and architectural design, and a circulation plan.

Planned unit development is a good choice for mixed-use development because the development plan for a PUD can customize land use and design. The approval process, however, can cause uncertainty and delay if improperly managed, and approval criteria can cause arbitrary decision-making if they are too ambiguous. See New Perspectives on Planned Unit Development, 52 Real Prop. Tr. & Est. J. 230 (2017).

Conclusion Zoning for mixed-use development requires a zoning choice that must be made from a variety of zoning alternatives. There is no standard metric that can identify a successful zoning model.

Decisions must be made on how much to control the market, how much to control mixed-use development, and whether zoning should be by-right or require discretionary review. n

Published in Probate & Property, Volume 38, No 1 © 2024 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.

January/February 2024 61

CAREER DEVELOPMENT AND WELLNESS Unlocking the Stress Cycle Imagine you are settling in for another “day in the life” of a lawyer. You grab your coffee and settle in for what you hope will be a productive day. Then, you glance at your email, your heart rate picks up, and you tense up. A client emergency, perhaps? A panicked client, co-worker, or partner? A filing deadline thrown at you?

These are all scenarios that lawyers know all too well. And although it may not be heart-pounding, being-chasedby-a-saber-tooth-tiger-level stress, it often exists in at least low doses far too much of the time, which can lead to chronic stress.

Chronic stress has been linked to many adverse health effects, including weight gain, cardiovascular disease, a compromised immune system, and impaired cognitive function. Stress is also linked to mental health and professional issues, like depression, anxiety, and burnout. Stress’s effect on the brain is particularly problematic for lawyers, one of the most critical tools we rely on. A 2021 article published by Harvard Medical School titled “Protect Your Brain from Stress” cited evidence that chronic stress may rewire your brain.

Research has shown that animals experiencing chronic stress have less activity in their prefrontal cortex, the brain area associated with higher-level thinking and planning. See https://tinyurl.com/ kn3xp7pw.

This article will explore practical strategies and creative tools for unlocking the stress cycle to help combat Contributing Authors: Megan M. Moore, Megan Moore, Inc., megan@ meganmooreinc.com, and Heather C. Johnston, Sapphire Law Group, 111 Woodmere Road, Suite 240, Folsom, CA 95630, hjohnston.ca@gmail.com.

chronic stress and keep our bodies and brains healthy.

The Physiology of Stress Stress is a natural response to challenging situations. Although stress can be motivating in small doses and helpful in urgent situations, chronic stress can lead to numerous health issues. The “fight, flight, or freeze” response is our body’s ancient survival mechanism, preparing us to confront threats, flee from danger, or sometimes freeze like a deer in headlights. In today’s legal world, however, these responses are often activated inappropriately and at sustained levels.

How do we typically deal with stressful emails, client emergencies, or deadlines? Many of us push through the day’s stressors with an activated stress response. Short bursts of stress are expected, and the body is designed to respond to these stressors. The brain triggers a series of events, releasing epinephrine (more commonly known as adrenaline) and glucocorticoids (including cortisol). The body’s muscles tense up, breathing intensifies, and blood vessels rush blood through the body while the heart pounds and the gastrointestinal system reacts, causing butterflies in the stomach. But if that stress continues,

it can lead to over- or under-eating, asthma attacks, high blood pressure, increased risk of heart attack or stroke, inflammation, a suppressed immune system, chronic fatigue, metabolic disorders, and reproductive dysfunction.

The response that is helpful in the short term becomes extremely damaging if left unchecked.

Not all stress is bad, and interesting research concludes that how you view stress contributes to whether stress is detrimental to your health. The important takeaway is to understand the physiology of stress better, decide how you want to manage stress, and take action to avoid the harmful health effects of chronic stress.

Completing the Cycle It’s well known that exercise generally helps reduce stress. We would probably be less stressed if we all had time for the activity we know we need. But many lawyers do not have “time” for exercise, and even those who regularly make time for it may be caught off guard by a more than occasional professional stressor. The good news is that there are other tools you can use. Some don’t take much time and can have a significant impact. The key to unlocking stress is to complete the stress cycle.

If you remember nothing else from this article, remember this: Stress is a biological process that needs to run its course—you don’t want to get stuck in idle. Stress is not the enemy; remaining stressed is.

Imagine what would happen to a car if it got stuck in idle rather than turning off and resting when it parked in the garage. How quickly would that wear down the engine and all other parts when a car is left running? The same concept applies to our bodies. Our

Published in Probate & Property, Volume 38, No 1 © 2024 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

heart, blood vessels, and other stressactivated systems are “running” when they should be resting, causing them to wear out before they should. If you recognize your body’s physiology and, rather than continuing to idle ininstress perfection of security interests digital mode, physically release thatCh. stress, property. 2022 Idaho Laws 284. your body can return to normal—like turning the car off. an agent to present an ILLINOIS allows electronic copy of an executed form as

Exercise proof of the health care agency. 2022 Ill. Legis.

Serv.burst P.A. 102-794.

Even a short of energy can help signal the body to return to “safety” or INDIANAwhen adoptsyou Uniform TrustRather homeostasis are done.

Decanting Act. 2022 Ind. Legis.

Serv. than being sedentary after a surge of P.L. 161-2022. stress hormones, complete the cycle in any way that you can at the time. JumpINDIANA increases the value of an ing jacks, burpees, running, pacing, estate that may be deemed a “small or even walking. You can run up a few estate” from $50,000 to $100,000. 2022 flights of stairs.

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151-2022. challenging day, as hard as it may feel to do more, endingadopts the day someDirected physiKANSAS thewith Uniform cal Trust activity reset your body, pave Act.can 2022 Kan. Laws Ch. 16. the way for quality sleep, and end the MAINE the rightsdays. of an adult stress cycleenhances for the following subject guardianship.

2022 Me. Even into short bursts, exercise is aLegis.

Serv. Ch. 500. powerful tool for managing stress. It helps maintain physical health and MARYLAND enacts special rules for plays a crucial role in regulating stress the partition of real property among hormones. In addition to signaling co-tenants such as co-devisees and coto your body that a threat is over, regheirs. 2022 Md. Laws Ch. 401. ular physical activity increases the production of endorphins, our body’s MISSISSIPPI authorizes benefi ciary natural mood lifters.

Fitness profes-of a designations allowing for a transfer sionals recommend least motorgenerally vehicle upon death and at permits 150vehicles minutes of moderate or 75 minto be held jointly with rights of utessurvivorship. of intense 2022 exercise week Miss.per Laws H.B.to 1430. benefit mood, sleep, and focus. Many MISSISSIPPI prohibits discrimination fitness professionals recommend more. decisions regarding anatomical gifts Butinremember, not too much, you have or organ transplants solely based to rest—even from good stress like on disability. 2022 Miss. Laws H.B. 20. exercise.

NEW JERSEY allows motor vehicles

Leisure Activities and Hobbies to be titled in transfer on death form.

For those unable to do some of the sug2022 N.J. Sess. Law Serv. Ch. 13. gested physical activities, research has shown that pleasurable activities that OHIO prohibits insurers from discrimreassure the body that the threat is inating against living organ donors.over will2022 also Ohio help Laws to complete File 90. the stress cycle. So you can paint, garden, color, complete a puzzle, or listen to music.

OKLAHOMA enacts the Uniform Testamentary Additions to Trusts Act. a Choose anything that you consider 2022activity, Okla. Sess.

Lawsignals Serv. Ch. leisure which to186. your body that there are no physical threats OKLAHOMA passes the Oklahoma to its safety.

Mindfulness period and then moves a person into a Meditation has been around for thoustate of relaxation, revving up the symKEEPING CURRENT R O B AT E sands of years, and the most recent pathetic nervous Psystem and lowering research on mindfulness concludes that the stress hormone cortisol. If stressed, the benefits include stress reduction. find time for a quick joke and laughter Meditation not only gives your body with a good Pick up the of phone SOUTH CAROLINA enacts the UniUTAH adopts thefriend.

Uniform Partition a rest, like leisure activities, but it also and call your funniest friend, or pull up form Transfers to Minors Act. 2022 S.C. Heirs’ Property Act. 2022 Utah Laws Ch. can improve your ability to pay attenyour favorite meme.

Laws Act 128.

304. tion and focus on what’s in front of you.

An easy DAKOTA way to build your practice to is to UTAH Conclusion SOUTH allows succession establishes a framework for the set aproperty timer, sit and breathe.ownership In the demanding world of law, real bycomfortably, affidavit under speciof digital assets.

2022 Utahlegal fiAnother ed circumstances.

S.D. Lawsand Ch.feel Laws Ch. 448. trick is to2022 step outside professionals must prioritize stress 89. the sun’s warmth while taking deep reduction to maintain their mental and the Uniform Fidubreaths, which allows you to purpose- VIRGINIA physicalenacts well-being.

Exercise offers a SOUTH DAKOTA authorizes remote ciary Income and Principal Act. 2022 fully slow down and give your body a practical and evidence-based approach witnessing non-holographic Va. to Laws Ch. 354. stress by decreasing stress break fromofthe stress cycle. wills, managing durable powers of attorney for health hormones and promoting relaxation, care decisions, anatomical gifts, refusals WASHINGTON enacts the Revised Connect and Laugh but it is not the only method for reducto make anatomical gifts, and pre-need Uniform Unclaimed Property Act. 2022 There is also research showing that ingLegis. stress.Serv.

Meditation cremation authorizations. 2022 S.D. Wash.

Ch. 225. or mindfulness physical contact and laughter reduce also gives your body a break. And even Laws Ch. 56. stress. A hug from a loved one is just WEST some simple things, hug or a good VIRGINIA adoptslike theaUniform what the doctor ordered (hang on joke, will interrupt the rising stress you TENNESSEE passes the Small Estate Unclaimed Property Act. 2022 W.Va. for davit a fewLimited extra moments because the Laws can feel when sitting at your desk. The Affi Letter of Authority H.B. 4511. research saysfor at least 20 seconds). of key is to find a few tools that work for Act providing the administration small estates.

Tenn.

Pub. Ch. WISCONSIN provides for nonproResearch also2022 shows thatLaws laughter you and then use them to complete the 665. transfers of n farming implements at increases heart and respiratory rates batestress cycle. and oxygen consumption over a short death. 2021–2022 Wisc. Legis Serv. Act US VIRGIN ISLANDS adopts the Uniform Electronic Wills Act. 2022 V.I. Laws Act 8556.

201. ■

US VIRGIN ISLANDS enacts the Uniform Law on Notarial Acts. 2022 V.I. Laws Act 8542.

TAKE PROBATE & PROPERTY TO GO https://issuu.com/rptelaw

Health Care Agent Act. 2022 Okla. Sess.

Published Probate & Property, Law inServ.

Ch. 136. Volume 38, No 1 © 2024 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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33

THE LAST WORD Are You a Novelist or Philosopher?

Ayn Rand, founder of the objectivIt strikes me that, as attorneys, we ism philosophy she named, brought are much like the novelist Ayn Rand her views to life in traditional philosodescribes, even if we aren’t trying to phy writings and novels, including The become authors. Our novel as counselFountainhead and Atlas Shrugged. It is ors at law is embedded in the advice unusual to publish in two formats, and we give, how we prepare documents, when asked whether she was primarand how we develop a strategy for a ily a novelist or philosopher, she replied, court case. Naturally, we do so out of “Both.” our philosophical framework. This As she wrote in For the New Intellecraises a question: Are we aware of our tual, “In a certain sense, every novelist framework and its effect on how we is a philosopher because one cannot understand and counsel clients? present a picture of human existence As attorneys, we often bring a value without a philosophical framework; system, knowingly or unknowingly, the novelist’s only choice is whether into a meeting. We likely have a prethat framework is present in his story ferred approach to given situations explicitly or implicitly, whether he is —consciously or not. We inherently aware of it or not, whether he holds his bring this paradigm into the meeting, a philosophical convictions consciously prism through which we interpret the or subconsciously.” Ayn Rand, For the client’s facts and goals and render legal New Intellectual: The Philosophy of Ayn advice.

Rand vii (Random House 1961).

To be the best advisor possible, we Some attorneys have become very should know how our frameworks can successful authors; John Grisham and steer clients. Yet, therein lies the conunDavid Baldacci come to mind. In a drum. How do we use our experiences 2022 interview with the ABA Journal, and framework to advise clients withBaldacci recounts his departure from out distorting the client’s goals? The Big Law, having been in private practice answer may be a paradigm shift. in Washington, DC. See https://tinyurl.

The late Stephen Covey wrote a woncom/49zem24z. He tells of countless derful depiction of a paradigm shift: questions from attorneys who want to I remember a mini-paradigm shift that follow his path and suggests they disI experienced one Sunday morning on a cern whether the story is law-themed subway in New York. People were sitting because it is compelling to them or quietly—some reading newspapers, some because it is a subject they know about. lost in thought, some resting with closed In the latter’s case, he suggests that eyes. It was a calm, peaceful scene. Then without a passion for the plot, their suddenly, a man and his children entered “creative fuel tank is going to be empty” the subway car. The children were so loud after about one hundred pages. and rambunctious that instantly, the whole climate changed.

The man sat beside me and closed his eyes, oblivious to the situation. The chilThe Last Word Editor: Mark R. Parthemer, dren were yelling back and forth, throwing Glenmede, 222 Lakeview Avenue, Suite things, even grabbing people’s papers. It 1160, West Palm Beach, FL 33401, mark. was very disturbing. And yet, the man sitparthemer@glenmede.com. ting next to me did nothing.

It was difficult not to feel irritated. I could not believe he could be so insensitive to let his children run wild like that and do nothing about it, taking no responsibility. It was easy to see that everyone else on the subway felt irritated, too. So finally, with what I felt was unusual patience and restraint, I turned to him and said, “Sir, your children are disturbing a lot of people. I wonder if you couldn’t control them a little more?”

The man lifted his gaze as if to come to a consciousness of the situation for the first time and said softly, “Oh, you’re right. I guess I should do something about it. We just came from the hospital where their mother died about an hour ago. I don’t know what to think, and I guess they don’t know how to handle it either.”

Can you imagine what I felt at that moment? My paradigm shifted. Suddenly, I saw things differently…

Stephen Covey, The Seven Habits of Highly Effective People 30 (New York: Fireside, 1989).

The takeaway is that there may be times when we need to shift our perspective to focus on the fact that we may have a predisposition due to our philosophical framework. Doing so could allow us to pause and listen to the client fully before providing the novel that is our advice and legal opinion. This puts us in a position to be precise (and objective) in our expression.

When we write a best-selling novel, insightful legal treatise, or advise clients, our framework is always present.

In many ways, it enriches our wisdom and understanding; however, a failure to know our framework or a lack of awareness of its presence could diminish our effectiveness. So, be a novelist and a legal philosopher, but coupled with awareness and attention, your advice will be even more understandable.n

Published in Probate & Property, Volume 38, No 1 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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January/February 2024

2023 EXCELLENCE IN WRITING AWARDS The editors of Probate & Property are pleased to announce the winners of the magazine’s 2023 Excellence in Writing Awards: BEST CUTTING-EDGE ARTICLES REAL PROPERTY Impact of Buildings on Global Warming

By Helen J. Kessler (July/August)

TRUST & ESTATE Designing Long-Term Trusts to Hold Art and Collectibles

By Michael Duffy (July/August)

BEST PRACTICAL USE ARTICLES REAL PROPERTY Lease Work Letters, Part One: When the Landlord Performs the Work Lease Work Letters, Part Two: When the Tenant Performs the Work

By Marie A. Moore and G. Trippe Hawthorne (May/June and July/August)

TRUST & ESTATE 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 (November/December)

BEST OVERALL ARTICLES REAL PROPERTY All Right, All Right, All REIT: Complexities and Considerations of Real Estate Investment Trusts

By Xenia J.L. Garofalo and Hasnain Valika (July/August)

TRUST & ESTATE What Could Go Rwong? Choosing the Best Drivers for the Estate Planning Bus

By Jay E. Harker (May/June)

All articles published in Probate & Property during the current year will be eligible for the 2024 Excellence in Writing Awards. Any author interested in submitting an article should contact either Michael Sneeringer or Kathleen Law at the addresses listed on page 3.

The magazine’s “Memorandum for Authors” is posted on the ABA website at ambar.org/ppmemo.

The American Bar Association’s 36th Annual RPTE National CLE Conference

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