eReport 2025 Spring - ABA Section of Real Property, Trust and Estate Law
By Clay R. Stevens
By Yaél M Weitz, Lawrence M Kaye and Kate Aufses
By William W. Riggins and Richard A. Loube
Samuel Dangremond
Articles
Cheryl Kelly (RP)
Assistant
John Trott (RP)
Editor
Robert Steele (TE)
Catherine (Kate) Williams (RP)
Sarah Dawn Cline (RP)
Technology/Practice
Martin
(TE)
Articles
Keri Brown (TE)
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Jeffrey Hopkins (TE)
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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.
Balancing Act: Estate Planning Options for Appreciated Assets That Consider Future Income Tax Consequences
By Clay R. Stevens1
Although the transfer of appreciated assets can reduce estate taxes at the donor’s passing, it may lead to higher income taxes for beneficiaries. To address these complexities, Clay R. Stevens explores creative estate planning strategies that balance the potential loss of a step-up in income tax basis with the benefits of estate tax reduction.
This article originally appeared in the April 2024 issue of “Estate Planning”, a Thomson Reuters publication. Some of the information regarding the estate tax exemption has been updated for republication.
Estate Tax laws are constantly changing2 and the current exemption amount of $13.99 million per person is the highest it has ever been.3 Proposals to reduce the exemption were floated in 2021 when the amount was $11.7 million but they were not passed.4 Regardless, the threat of the lower exemption caused some taxpayers to make large taxable gifts in advance of possible legislation5 - especially older taxpayers with significant taxable estates who were able to afford to gift the full $11.7 million. But, by gifting, those taxpayers gave up their ability to realize a step-up in income tax basis to fair market value upon their death on the appreciated assets they chose to transfer.6 Depending on the appreciation of the gifted assets, state and federal income tax rates, and timing of future sales, the additional income tax paid by beneficiaries who receive appreciated assets may exceed the estate tax saved through lifetime gifting.7 As will be explained in this article, if the taxpayer is unable to utilize their full exemption due to insuf-
ficient assets or future spending needs, the additional income taxes imposed may far exceed any estate tax savings.8
Although many practitioners believe that Congress will likely act to extend or make permanent the increased estate tax exemption (and some Republicans have proposed eliminating the estate tax altogether while retaining the step-up in income tax basis on assets included in the estate at death), current law provides that the estate tax exemption will automatically drop by 50% after 2025.9 Taxpayers who want to use their increased exemption before the change and who need to do so by gifting appreciated assets again will be faced with the decision of whether to make gifts to reduce estate tax or retain such assets until their passing to get a step-up in income tax basis. This article will review the factors that determine whether gifting in advance of such change will have a positive tax benefit and will discuss five unique estate planning options available to these taxpayers regardless of any change in the estate tax exemption:
(1) Exercise of Replacement Right in a Successful Sale to a Defective Grantor Trust,
(2) Rolling Grantor Retained Annuity Trust and Swap,
(3) Post First Death Planning for Spouses,
(4) Lifetime Charitable Planning, and
(5) Family Charitable Remainder Trust.
Total Tax Consequences of Gifting Appreciated Assets
Before discussing the various solutions, it is important to understand the tax issues. The assumption among many taxpayers (and advisors) may be that gifting assets will yield the largest tax savings since any appreciation on those gifted assets will be shielded from estate tax and the estate tax rate is higher than the tax rate on capital gain. If the estate tax exemption is expected to be reduced, then it could be further assumed that gifting makes even greater sense. However, the opposite is likely true in many cases when total tax is considered. For example, assume a taxpayer with a $9 million estate gifted $5 million of assets10 with an income tax basis of $4 million in year 2025 presuming her available exemption was going to drop from $13.99 million to $7 million. While the estate tax savings if she passed away would be zero, even if the law changed, the later sale of the gifted assets would subject the beneficiary to as much as $300,000 in income tax.11 The counter argument would be that by gifting, the future appreciation on the assets would also be excluded from estate tax and provide more benefit. But, in many cases the estate tax saved on the appreciation is offset by the additional income tax incurred on the growth.12 If the gifted assets are likely to be sold prior to death of the taxpayer, the loss of the step-up in basis is less applicable, but the estate tax benefit of passing the growth outside the estate is still lessened by the additional income
tax incurred by the recipient.13 Even in the unique situations where there is some net overall tax benefit considering the interplay between estate and income tax, that benefit can be much less than the taxpayer expected and may not be worth the spending constraint on the taxpayer giving up access to a larger portion of their net worth.14
While increased overall taxes by gifting can be the result when a taxpayer has a smaller estate subject to tax, some taxpayers (and advisors) assume that if the taxpayer has sufficient assets to gift their full $13.99 million, the loss of the step-up will be far outweighed by the estate tax savings. However, if the only assets available for gifting have a very low basis - such as depreciated real property or closely-held founder stock - the opposite will often be true. Specifically, if the taxpayer gifted $13.99 million of assets with a $4 million basis, due to the negligible difference between the income tax rates and estate tax rates and loss of the step-up in basis, the gift does not produce any net overall tax savings15 even if the estate tax exemption drops in half after year 2025.16 Furthermore, in situations where the income tax basis of the property gifted is more than 30% of the total value such that gifting could produce some overall tax savings, if the taxpayer passes away before year 2026 or if the increased exemption is renewed, the gift will result in more overall tax to the beneficiaries.17 To prevent this worst case scenario where gifting to reduce estate tax only increases income taxes, a taxpayer may be better off waiting until 2025 to decide whether to make a gift. This is especially true for married taxpayers who receive a step-up in income tax basis at the first death and can avoid any estate tax at that time using the unlimited marital deduction on transfers to a spouse.18 The loss of the step-up in income tax basis has less negative effects if the recipient has no plans to sell the asset but may still create more income tax if the property is depreciable.19 If the taxpayer instead believes the asset will be sold prior to death at a higher price and can use a grantor trust to shield the recipient from having to pay the income tax, then the loss of the step-up in income tax basis will also have a less negative effect.20 However, a premature death before the asset is sold could negate any benefit of engaging in estate planning to shift the appreciation out of the estate.
While waiting until closer to December 31, 2025 to do outright gifting is beneficial for most taxpayers with predominately appreciated property, outright gifting for the reasons stated above may never be desirable. However, that does not mean those taxpayers who are likely to have a taxable estate should be resolved to do nothing and pay higher estate taxes. This is especially true if the assets of the taxpayer are likely to appreciate over time. Instead, taxpayers will need to look to more creative solutions that are designed to reduce future estate tax and preserve the step-up in basis. One option is to use a relatively common strategy, a Sale to a Defective Grantor Trust, but plan to take additional steps to preserve the step-up in basis.
sulting in more than $3 million in income tax. With the GRAT, a premature death would have resulted in $800,000 in estate tax but the net tax savings from the avoidance of income tax would be over $2.2 million. Even if the assets transferred had only $2 million of gain upon contribution (i.e., an $8 million income tax basis and $12 million value at death) the additional $1.2 million in income tax would still outweigh the estate tax savings. While there may be some particular tax situations or growth scenarios where the estate tax savings with the DGT will exceed the GRAT on a premature death,43 it should not be automatically assumed that the GRAT is not the preferred option of someone with a shorter life expectancy.
To the extent that a taxpayer decides to transfer highly appreciated assets to a GRAT to minimize future growth from being included in the estate, there are still steps that can be taken to minimize the risk of a premature death. First, instead of doing a longer term GRAT, the taxpayer could create the GRAT with the minimum two year term.44 If, at the end of the second year, the appreciated assets have not been sold, the GRAT must return most of the appreciated assets to the taxpayer as annuity payments (therefore including those assets in the taxable estate but benefiting from a step-up in basis at death).45 However, to the extent the growth on the assets exceeds the stated applicable federal rate on the date of contribution and therefore the total GRAT assets exceed the required annuity payments, the excess can remain in a trust and be excluded from the estate.46 That remainder trust can be set up as a grantor trust so that taxpayer can then swap non-appreciated property for the remaining appreciated assets held by the remainder trust without income tax consequences.47 If the taxpayer retains those appreciated assets until death, she would then receive a step-up in basis on those appreciated assets and the unappreciated assets would escape estate taxation.48 This is similar to the DGT strategy mentioned above although the exchange would typically occur immediately at the end of the two year GRAT so there is little risk of the assets missing out on the step-up in income tax basis.
The main problem with this strategy is that about half of the property is returned to the taxpayer at the end of year one, much of the remaining property is returned at the end of year two, and even the growth on the excess swapped back to the taxpayer on a successful GRAT is included in the grantors estate. Therefore, if the assets continue to appreciate, that growth will be included in the taxpayer’s estate. However, if the taxpayer sets up a series of GRATs by immediately rolling the GRAT annuity distributions at the end of years one and two, as well as any additional property swapped back into the estate from a successful GRAT, into a new GRAT then the taxpayer can get the future appreciation on the property out of the estate.49 When the taxpayer passes away, only the GRATs created during the last two years will be included in her estate and either way the property in those GRATs will receive a stepup in income tax basis at death.50 To minimize the administrative inconvenience of managing multiple trusts long-term, the annual distributions of assets from any outstanding GRATs
can be added to a single new GRAT each year and the excess from any successful GRAT can be passed into a single remainder trust.
While this strategy does involve several transfers and requires the creation of at least one new GRAT each year, it can be very successful for taxpayers with highly appreciated assets that are likely to continue to appreciate. However, this strategy does not allow generation-skipping tax (“GST”) planning since the GST exemption cannot be allocated to the property until the end of the initial GRAT term after the property has appreciated.51 Additionally, this strategy does not work well when the property being contributed is difficult to value since it will require a new determination of value upon the contribution to the GRAT and upon each annuity payment in-kind. Lastly, to the extent the taxpayer has no non-appreciated assets to exchange with the remainder trust at the end of the term, then some of the appreciated property will remain in the remainder trust and not receive a step-up in basis. However, unlike the DGT sale where the entire property misses out on a step-up in income tax basis at death, in this situation only the appreciation held in the remainder trust will be later subject to income tax. For older married taxpayers, especially those residing in a community property jurisdiction, doing a modified GRAT or sale to a DGT with appreciated property may not be advisable, at least not until the death of the first spouse.
Post First Death Planning for Spouses
For married taxpayers, there is an advantage in trying to preserve a step-up in basis with estate planning since estate tax can be avoided at the first death under the unlimited marital deduction.52 The surviving spouse will have the ability to do estate tax planning, such as an outright gift or sale to a DGT53 following the first death with the assets that received a resulting step-up in basis. The married couple will also be able to use the first spouse to die’s estate tax exemption to shield future growth on assets without sacrificing the step-up at the first death.54 If the married couple has high basis assets with which to do planning and/or is unlikely to hold assets until death to get the step-up in basis due to age or the nature of the asset, waiting to do planning will be less effective since the loss of the step-up in basis is less meaningful. However, for a married couple with mostly appreciated assets with which to do planning, this strategy provides some estate tax benefit without the large corresponding income tax detriment.55 For taxpayers who live in a community property jurisdiction, this benefit is even greater since the surviving spouse will receive a step-up on 100% of their community property assets at the first death.56
One concern in proposing the surviving spouse gift away assets after the death of his spouse is that the surviving spouse still needs assets to support his lifestyle spending throughout the remainder of his lifetime. To the extent the estate plan is set up to fully fund a Bypass Trust for the benefit of the surviving spouse at the first death, then the surviving spouse can rely on those assets if he exhausts his share of the non-gifted estate.57
For example, if the estate consists of $18 million of appreciated community property at the first death in 2026 and the exemption has returned to $7 million per person, the deceased spouse’s estate could set up an irrevocable trust for the benefit of the surviving spouse (the “Bypass Trust”) with $7 million of non-appreciated assets, due to the step-up in basis, and the remaining $11 million of non-appreciated assets could pass to the surviving spouse. The surviving spouse could then gift $7 million of non-appreciated assets to the couple’s heirs and use the remaining $4 million for living expenses. If the surviving spouse exhausts those funds during his lifetime, then he could receive support and maintenance distributions from the Bypass Trust. In that case, upon the surviving spouse’s death, no estate tax would be due58and the beneficiaries would have a basis in the remaining assets of no less than $14 million.59
Another complicating factor in this planning arises from the fact that many couples do not want to give the surviving spouse unlimited discretion to dispose of the deceased spouse’s share of the estate for fear that the surviving spouse will later decide to disinherit the deceased spouse’s heirs. This concern can be mitigated to the extent the estate of the deceased spouse creates a Bypass Trust with the deceased spouse’s remaining estate tax exemption.60 For amounts over the estate tax exemption or to the extent a Bypass Trust is not created at the first death, another common technique is the use of an irrevocable Qualified Terminable Interest Property Trust (“QTIP”) at the first death to hold the deceased spouse’s share of the estate.61 While this helps protect against the surviving spouse from disinheriting the deceased spouse’s heirs, it may prevent the surviving spouse from maximizing their estate tax reduction opportunities at death.62 While an alternative would be for the surviving spouse to purchase assets from the Trustee of the QTIP for an interest-bearing note and then to gift some or all of those assets to get the future appreciation on those purchased assets out of the estate, there are fiduciary responsibilities that must be considered63 and payments of interest on the note may create income tax consequences. Therefore, if the plan is for the surviving spouse to gift assets after the first death or sell assets to a Defective Grantor Trust, the better option is to transfer such amounts outright to the surviving spouse.
A problem with this strategy of waiting for a step-up at first death arises when the spouses have a longer life expectancy and the assets are increasing in value, since waiting to do planning causes the taxable estate to grow and therefore more estate tax to be due. In that case, it is best to pair another strategy, like the Sale to Defective Grantor Trust and exchange,64 or Rolling Grantor Retained Annuity Trusts and exchange,65 while the spouses are younger and then use this Post Death Planning as the spouses get older. But, if a taxpayer with appreciated property is also charitably inclined, additional opportunities are available - either as a substitute for the above-mentioned strategies or as a part of an overall strategy.
Lifetime Charitable Planning
For gift and estate tax, the law provides a 100% charitable deduction66 for amounts passing to a qualified public charitable organization.67 Most of a qualified public charitable organization’s income is tax-exempt so gifting or bequeathing appreciated property to them allows them to sell that property without recognition of income tax.68 If a taxpayer sells an appreciated capital asset during life and bequeaths the after-tax cash proceeds to their heirs at death, the effective overall tax rate could be as high as 58%.69 As a result, the after-tax cost to the heirs of gifting the appreciated capital asset to charity could be as little as 42% of the original amount.
A charitable contribution will result in zero gift or estate tax regardless of whether one contributes during life or at death, but by satisfying the bequest with appreciated capital assets during life, the donor receives additional income tax benefits. If the appreciated capital assets are gifted to a public charity, and not a private foundation, then the donor can also take an income tax deduction equal to the fair market value of the assets - regardless of whether the assets have appreciated.70 While the amount of the income tax deduction that can be used to offset the income tax of the donor in any year is limited to a percentage of the donor’s adjusted gross income for the year,71 the full fair market value of the contributed asset is deductible. Assuming the taxpayer can utilize the full deduction against ordinary income, the after-tax cost of gifting appreciated capital assets to charity during life drops to as little as 12% of the original amount of those assets.72 Even if one does not account for the estate tax due on passing the sale proceeds to a beneficiary, since it occurs much later, the avoidance of capital gains tax on the sale plus the income tax deduction can result in an after-tax cost of giving appreciated assets to charity for as little as 20% of the original amount.73
If the taxpayer has charitable intent but has not yet identified a charitable organization that she would like to gift the appreciated asset during life, a good option is to transfer the appreciated asset to a private foundation74 or a donor advised fund created at a sponsoring organization qualified as a public charity.75 If the contribution of the appreciated property to the charity is made well in advance of the later disposition by the public charity,76 then the charity will be able to dispose of the property without income tax77 and the donor can distribute the full fair market value of the proceeds from the sale of the property to charities over time. However, if the appreciated property is not publicly traded securities, then giving to a private foundation will limit the donor’s income tax deduction to the donor’s income tax basis so giving outright to a donor advised fund at a public charity provides a better income tax result.78 Additionally, a gift to a private foundation versus a donor advised fund also reduces the percentage of the donor’s adjusted gross income that can be offset in any given year from 30% to 20%.79 However, a taxpayer can divide the gift of appreciated property between a private foundation and a donor
advised fund in order to be able to deduct up to 30% of the donor’s adjusted gross income in any year.80 In either case, any charitable deduction not used in any taxable year can be rolled over for up to five years and can offset future taxable income of the donor.81
If the taxpayer with an appreciated assets has charitable intent but needs some of the proceeds from the later sale, a good option is the use of a charitable remainder trust. Charitable remainder trusts are statutorily approved vehicles that taxpayers can use to defer recognition of income tax on the sale of appreciated property.82 Like other charitable vehicles, to the extent appreciated assets are contributed to the charitable remainder trust in advance of disposition,83 a taxpayer can effectively diversify his holdings and defer recognition of any gain until the taxpayer receives distributions from the charitable trust.84 The taxpayer will receive annuity distributions each year from the charitable remainder trust based on a percentage of the value of assets held in the trust.85 The annuity distributions to the donor can continue for the lifetime of the taxpayer or a term of years no greater than 20 years.86 Since the taxpayer is retaining an annuity interest in the trust assets, the deduction will only be the present value of the charitable interest passing to charity at the end of the term87 and that amount must be at least 10% of the assets contributed to the trust.88 However, at the end of the term, the trust assets are distributed to charity, which can include the taxpayer’s private foundation, and so there is no estate tax due. As a result, like outright gifts to charity, the taxpayer using a charitable remainder trust can avoid immediate recognition of the gain upon the sale, avoid estate taxation, and get an income tax deduction to offset other taxable income.
For taxpayers with strong charitable intent, transferring appreciated assets to a charitable vehicle allows the taxpayer to satisfy her charitable goals in a tax efficient manner. Some taxpayers are less charitably motivated but may instead provide large amounts to charity at their passing for fear that giving their entire estate to their children will have negative effects on their children’s productivity.89 Other taxpayers provide large bequests to charity at their passing primarily to avoid the 40% estate tax due.90 In all of these cases, satisfying these testamentary charitable goals by gifting appreciated property during life provides the best overall tax result and can minimize the need to other tax planning. Again, these charitable strategies can be paired with some of the above-mentioned estate planning techniques to provide estate tax and charitable benefits. However, there is another option that uses a single strategy for appreciated assets to achieve both estate and charitable benefits in a tax efficient manner - the Family Charitable Remainder Trust.
Family Charitable Remainder Trust
While making outright gifts of appreciated property to charity or transferring appreciated property to a charitable remainder trust during life is a great way to satisfy charitable intent in a tax advantaged way, these are not great options for taxpayers
who want to transfer their appreciated property to family or other individuals.91 One option that provides the tax advantages of a charitable transfer while providing a substantial wealth transfer to individual beneficiaries is a Family Charitable Remainder Trust (“FCRT”).92
The FCRT is a technique that effectively allows a taxpayer to diversify an appreciated position without immediate income tax and pass wealth to individuals like successive generations without substantial transfer tax.93 Additionally, like the charitable options mentioned above, it provides the taxpayer with an immediate income tax deduction and a significant benefit to the taxpayer’s favorite charity.94 The FCRT in its most simple form combines three established structures, a family limited partnership, a charitable remainder trust, and a sale to a grantor trust, in a unique way.95
The FCRT starts with a family limited partnership funded with highly appreciated publicly traded securities.96 The taxpayer would hold all the limited partnership interests in the entity and such interest would represent 99% of all interests in the entity.97 The taxpayer would then create a DGT for the benefit of her heirs and gift cash or property to the trust.98 The amount of the “seed” gift is typically equal to 10% of the amount to be later sold to the trust but can be less if the taxpayer does not have sufficient lifetime exemption remaining.99 The taxpayer will also want to allocate generation-skipping transfer tax exemption to the gift so that the trust can be held estate tax-free for multiple generations.
Where the strategy differs from a normal sale to a DGT is that the partnership then creates a 20-year fixed term100 charitable remainder trust with the largest permissible annuity that provides a charitable remainder equal to 10% of the fair market value of the property contributed-typically about 11% per year.101 The contribution would create a charitable deduction and at least 99% of the charitable deduction passes to the taxpayer as the owner of all the limited partnership interests in the entity.102 The taxpayer then sells the limited partnership interests to the previously created DGT in exchange for a secured promissory note equal to the appraised fair market value of the interest.103 The appraised fair market value will be reduced by the 10% remainder interest set-aside for charity and likely will garner a minority interest discount equal to, if not greater, than the marketability discount applicable to a standard family limited partnership holding marketable securities.104
The appreciated property contributed to the charitable remainder trust can then be liquidated without immediate income tax and the sale proceeds reinvested in a diversified portfolio.105 The charitable remainder trust would make the 11% distribution annually to the entity in cash and the entity can either reinvest the cash in the entity or distribute some of it to the partners - 99% of which would pass to the DGT.106 The DGT could then use the distribution to make interest and principal note payments to the taxpayer.107 While any distribution passes 99% to the DGT, the gain passing to the partners from the charitable remainder trust distribution passes to the tax-
payer due to the grantor trust nature of the irrevocable trust.108 As a result, the trusts effectively receives the 11% distribution tax-free. The taxpayer can then use the note payments to pay any income tax associated with the distribution.109 Depending on the growth assumptions, it is expected that the notes could be fully repaid to the taxpayer from the DGT in 10-12 years.110 The remaining 8-10 years of distributions from the charitable remainder trust accumulate in the DGT income tax-free and the taxpayer will further deplete her estate by continuing to cover the income tax associated with such distributions for the full 20 years.111 At the end of the 20 years, the balance of the charitable remainder trust then passes to the taxpayer’s chosen charity, which can include the taxpayer’s private foundation.112 In the end, the FCRT allows the taxpayer to liquidate out of an appreciated position without immediate recognition of income tax and converts the proceeds into an income stream passing in part to a taxpayer’s beneficiaries, like children and grandchildren, in a highly tax advantaged way.113 The main caveat with the FCRT is that the taxpayer does have to want a portion of their estate to pass to charity. If they do not then the first three strategies suggested above are likely better options.
Conclusion
For taxpayers holding highly appreciated assets, gifting those assets in advance of any potential estate tax law change in 2025 can result in more overall tax when considering the additional income tax created by the loss of step-up in basis at death. However, there are planning options available to taxpayers with appreciated assets who are likely to have a taxable estate. Taxpayers with time can transfer appreciated assets to a defective grantor trust and later exchange of those appreciated assets back for higher basis assets. Taxpayers with a shorter life expectancy could instead do a series of rolling grantor retained annuity trusts to prevent against the risk of a premature death before the exchange. However, for older married taxpayers, waiting to do such planning until after the first death may be more advisable. For charitably minded taxpayers, using the appreciated assets to fund charitable transfers during life or at death can provide substantial tax benefits. For those charitably minded taxpayers who also want to benefit their heirs or other individuals, the family charitable remainder trust can achieve both income tax and estate tax benefits. Therefore, given the uncertainty around potential tax law changes in 2025, taxpayers should consider all these tax planning options with a qualified professional before simply gifting away highly appreciated assets.
Endnotes
1. Clay R. Stevens, J.D., LL.M., is the Director of Strategic Planning at Aspiriant, providing estate planning, income tax, and philanthropy consulting services for high-net-worth families. Mr. Stevens is also the managing shareholder of Strategic Planning Law Group, P.C., and an Adjunct Professor of Law at Chapman University Law School. The author would like to thank his law partner, Dawn Baca, for her helpful edits to the original draft of this article.
2. While the estate tax regime was relatively consistent from 19811997 with the amount one could pass estate tax-free at $600,000 per person and the top estate tax rate at 55%, changes in the exemption or rate occurred almost every year since then. See Jacobson, Raub, and Johnson, “The Estate Tax: Ninety Years and Counting”, Internal Revenue Service, Compendium of Federal Transfer Tax and Personal Wealth Studies, pages 122-124, at https:/www.irs.gov/pub/irs-soi/ ninetyestate.pdf
3. Rev. Proc. 2024-40, section 2.41; see Jacobson, supra note 1.
4. Boxer and Jerabek, “Disappearing Act: What You Need to Know About the Estate and Gift Tax Provisions of the House Ways and Means Committee Tax Proposals,” National Law Review, October 15, 2021.
5. The proposed law was to be effective on January 1, 2022, and many estate planning professionals advised their clients to make taxable gifts in advance of the pending change. See id.
6. See I.R.C. Section 1014(a). For married taxpayers in a community property jurisdiction, both the decedent and her spouse would receive a full step-up in income tax basis to fair market of their community property assets at the first death regardless of whether the assets avoided estate tax under the unlimited marital deduction. See I.R.C. Section 1014(b)(6).
7. See infra notes 9-20 and accompanying text.
8. See infra notes 10-11 and accompanying text.
9. The basic exclusion amount for gift or estate transfers before December 31, 2025 is $10 million (indexed for inflation) and reverts to $5 million (indexed for inflation) automatically thereafter. I.R.C. Section 2010(c)(3)(C); see I.R.C. Section 2010(c)(2)(B); Pub L. No. 11597, section 11061(c), 131 Stat. 2054, 2155 (2017).
10. The financial planning limitation for many taxpayers is that gifting $13.99 million (or $27.98 million per couple) to fully take advantage of the existing higher exemption before the law changes creates real or perceived spending limitations on the taxpayers.
11. Upon death, the taxpayer’s remaining exemption would drop from $7 million to $2 million so the taxable estate would be $2 million with $800,000 in tax with or without gifting. Furthermore, by gifting, the loss of the step-up in basis could create $300,000 in income tax assuming a combined 30% federal and state income tax rate. The rate may be higher or lower depending on the state income tax rate, whether the gain on the assets is capital gain, includes depreciation recapture, or is ordinary income, and whether the taxpayer is at the top margin rate.
12. Even if the gifted assets appreciated by $2 million between the date of gift and date of death so the estate saves 40% in estate tax on the growth or $800,000, the additional income tax on that $2 million would be $600,000 at the same 30% rate. Therefore, the total tax would still be $1.7 million after gifting ($800,000 in estate tax and $900,000 in income tax on the $3 million of appreciation) and only $1.6 million (all estate tax on $11 million) by not gifting. The exception would be situation where the growth on the gifted assets was expected to be much larger or the federal and state tax rates were much lower. There is also a timing issue in that the additional estate tax is due immediately upon death versus the gains are not recognized until the gifted assets are sold.
13. If the gifted assets had a $4 million income tax basis and were sold for $7 million by the donee, the $800,000 in estate tax saved by getting the $2 million in growth out of the estate would be primarily offset by the $700,000 in income tax incurred by the donee (assuming the same 30% tax rate). The exception would be for gifts made to a grantor trust since if the assets were sold prior to death of the grantor then such tax is not imposed on the donee but the grantor.
14. See supra note 9. Another option that might be considered for an older taxpayer with unencumbered real property is to have taxpayer borrow against the real property and gift the cash with the plan to repay the debt following the taxpayer’s death and after the real property receives a step-up in basis. This results from the fact that I.R.C. Section 1014(a) provides a basis increase for the gross fair market value whereas the estate tax is imposed on the net value. See I.R.C. Section 2053(a)(4). Borrowing costs, interest rates, and the investment of the borrowed funds dictate whether this is an economical solution but could be a short-term option.
15. Assuming the state and federal combined income tax rate is 30% and the estate tax exemption drops by 50%, gifting assets equal to the full $13.99 million saves $2.796 million in estate tax or 40% of the $6.99 million in exemption that will be lost when the law changes. However, the 30% income tax imposed on the $9.61 million in appreciation results in $2.883 million in income taxes. If the sale of the property produces depreciation recapture income or the taxpayer resides in a state with a high state income tax such as California or New York, then the income tax rate may be higher than 30%.
16. See supra note 8.
17. If the taxpayer passes away before the expiration of the increased estate tax exclusion, gifting itself will provide no estate tax benefit and only subject to the beneficiaries to more income tax on the sale of the assets due to the loss of the step-up in basis.
18. The step-up in income tax basis under I.R.C. Section 1014 is not dependent on the imposition of estate tax so transfers at death to a spouse can be estate tax-free and allow the spouse to sell the assets without income tax. See I.R.C. Section 2056(a). If the taxpayers reside in a community property state, the step-up in basis can even include the surviving spouse’s one-half of the community property. See supra note 5.
19. If the appreciated property is business real property, the loss of the step-up in basis will prevent the donee from taking depreciation deductions to reduce the future taxable income from the property even if the property is not intending to be sold. See I.R.C. Section 167.
20. To the extent the gift is made to a trust classified as a grantor trust under I.R.C. Section 671 then any income tax on the sale of the asset during the grantor’s lifetime would be imposed on the grantor and not reduce the benefit passing to the recipient. See I.R.C. Section 671.
21. Mulligan, “Sale to a Defective Grantor Trust: An alternative to a GRAT,” 23 ETPL 3 (January 1996). See Aucutt, “Installment Sales to Grantor Trusts,” 4 No. 2 Bus. Entities 28 (March/April 2002).
22. See Mulligan, “A Sale to a BIDIT Should Work as Well as a Sale to an IDIT,” 46 ACTEC Law Journal 307, 308-309 (Summer 2021) (describing the use of a sale to a defective grantor trust as part of a different transaction).
23. Id. at 309.
24. I.R.C. Section 675(4)(C); see Mulligan, “Power to Substitute in Grantor Does Not Cause Inclusion, With a Significant Caveat,” 109 JTAX 31, 32 (July 2008).
25. See Stevens, “The Family Charitable Remainder Trust: Achieving Wealth Transfer and Charitable Goals in a Tax-Efficient Manner,” Taxes - The Tax Magazine 53, 57 (May 2010), (reviewing this strategy as well as a joint strategy combining the benefits of a family limited partnership, sale to a DGT, and charitable remainder trust).
26. See Mulligan, supra note 21, at 310-311.
27. See id. at 311.
28. See supra note 5.
29. See Stevens, “The Reverse Defective Grantor Trust,” 151 Trusts & Estates 33, 38 (October 2012) (discussing the ability to step up the basis of assets transferred from a grantor trust back to the grantor prior to death).
30. Id. at 38 (even if the transfer occurs within one year of death it should not prevent a step-up in basis).
31. Treas. Reg. 25.2702-5(c)(9).
32. This is one reason a sale of a residence to a grantor trust often provides better results than a qualified personal residence trust. See Stevens, “Using a Personal Residence DGT to Capitalize on Reduced Property Values,” 84 PTS 329, 332 (June 2010) (discussing the ability to exchange out the residence to obtain a step-up in basis at death with a sale of a residence to a grantor trust instead of a QPRT).
33. Stevens, supra, note 28.
34. If one is purchasing life insurance for estate tax purposes, it is often recommend to purchase the life insurance inside an irrevocable life insurance trust to prevent the life insurance proceeds from being subject to estate tax. See Gallo, Life Insurance Trusts Offer Tax Savings, 50 Tax’n for Acct. 324 (1993). For example, if the taxpayer transferred $5 million in growth assets with a built-in gain of $2 million to grantor trust with the assumption it would appreciate to $10 million in the next 9 years, there could be $7 million of inherent gain if the grantor passed away just prior to year 9 and the sale by trust could create as much as $2.1 million. If the grantor purchased a $2 million 10-year term policy inside an irrevocable insurance trust, the $2 million in proceeds could effectively offset the anticipated gain upon sale without increasing the estate tax.
35. Some commentators had speculated that the DGT should be entitled to an income tax basis increase on the trust assets under I.R.C. Section 1014, at least to the extent of any promissory notes outstanding at death. See Blattmachr, Gans, and Jacobsen, “Income Tax Effects of Termination of Grantor Trust Status by Reason of the Grantor’s Death,” 97 JTAX 148, 159 (September 2002). This argument was explicitly rejected in 2023 by a revenue ruling that stated in order for I.R.C. Section 1014 to apply the specific asset needed to be included in the taxpayer’s estate. Rev. Rul 2023-2, 2023-1 C.B. 1.
36. For example, assume a taxpayer engages in a “Sale to a Defective Grantor Trust” strategy wherein she transfers $12 million of privately company stock with little basis to a trust in exchange for a promissory note under the premise that the stock may double in five years and then be sold. If the taxpayer passed away unexpectedly before the asset had increased, the estate would not save any estate tax, but the beneficiaries would lose a step-up in basis on the full $12 million. That would result in $3.6 million in increased income taxes assuming a combined state and federal income tax rate of 30%.
37. I.R.C. Section 2702; see Saret, “The Estate Planner-Planner’s Toolbox: Grantor Retained Annuity Trusts (GRATs),” 93 Taxes - The Tax Magazine 33, 34-35 (Mar. 2015).
38. See Saret, “The Estate Planner-Planner’s Toolbox: Grantor Retained Annuity Trusts (GRATs), Part 2: Tax Consequences of a GRAT,” 93 Taxes - The Tax Magazine 31, 33 (May 2015) (discussing the ability to zero-out a gift to a GRAT).
39. See id. at 36 (discussing the mechanics of the GRAT and that any remainder interest after the annuity payments have been repaid to the grantor escape estate taxation).
40. See id. at 34-35 (discussing the portion of the GRAT included in the grantor’s estate upon death during the term).
41. See Manning and Hesch, “Deferred Payment Sales to Grantor Trusts, GRATs, and Net Gifts: Income and Transfer Tax Elements,” SSRN: https://ssrn.com/abstract=158489 or http://dx.doi. org/10.2139/ssrn.158489 1, 22 (Mar 31, 1999).
42. See Treas. Reg. 1.1014-2(b).
43. In situations where the beneficiaries reside in a state with no income tax, have other income tax losses to shield the gain, or the property is real estate that might be later sold using a tax-free 1031 exchange, then the loss of the step-up in basis may be less impactful.
72. Using the facts in note 68 supra, the income tax saved by making a $1 million lifetime charitable gift can be as high as $500,000 (assuming a combined state and federal original income tax rate of 50%). If that $500,000 in income tax savings by the donor were gifted to the heirs, the heirs would receive $300,000 even after gift tax were imposed. As a result, the after-tax cost to the heirs from not receiving the after-tax proceeds drops from $420,000 to $120,000.
73. Using the facts in notes 68 and 71 supra, gifting the $1 million in appreciated property to charity results in $300,000 in less capital gains tax and a charitable deduction worth $500,000 to the donor so the after-tax cost of the gift can be as low as 20%.
74. See I.R.C. Section 509(a) (an organization operated for religious, scientific, or other charitable purpose that is not otherwise qualified under I.R.C. Section 170(b)(1)(A) and not an operating foundation). A private foundation allows the funds to be managed by the donors and distributed over time and generally requires only 5% to be distributed each year. See Treas. Reg. 53.4942(a)-2(c)(1)-(5).
75. See I.R.C. Section 4966(d) (noting that a donor advised fund is a separate account held at a sponsoring organization qualified as a public charity under 170(c) wherein the donor is given advisory privileges over the investment and distribution of the assets to public charities).
76. See Schmolka, “Income Taxation of Charitable Remainder Trusts and Decedents’ Estates: Sixty-Six Years of Astigmatism,” 40 Tax L. Rev. 1, 22-23 (Fall 1984) (discussing the anticipatory assignment of income issues to the extent the assets are not transferred to the charitable entity far enough in advance). While no set amount of time, generally a month or more is a good guideline. However, an argument can be made that even if the transfer occurs only one day prior to the sale that the anticipatory assignment of income may not be violated. Id. However, one must be careful when such sale is tied to the sale of other stock (such as in a public offering) where the charitable entity might be obligated to sell regardless of how soon the shares are added to the trust.
77. The private foundation described in 509(a) and a donor advised fund created at a sponsoring organization are both exempt from income tax. See I.R.C. Section 501(c).
78. To the extent the qualified charity is instead a private foundation described in I.R.C. Section 170(c)(2), the donor’s deduction is limited to the donor’s basis in the property and 20% of her adjusted gross income for the year. See I.R.C. Section 170(b)(1)(D)(i). Any exception applies, however, for contributions of “qualified appreciated stock” such as most publicly traded securities, the donor’s deduction is not limited to basis and only the 20% adjusted gross income limit applies.
See I.R.C. Section 170(e)(5)(A).
79. See I.R.C. Section 170(b)(1)(D)(i).
80. See I.R.C. Section 170(b)(1)(A)-(D). For example, if a taxpayer with an adjusted gross income of $1 million gifts $100,000 of appreciated publicly traded stock to a donor advised fund and $200,000 of appreciated publicly traded stock to a private foundation, the taxpayer could fully deduct the $100,000 gift to the donor advised fund under I.R.C. Section 170(b)(1)(B) and the $200,000 gift to the private foundation under I.R.C. Section 170(b)(1)(D) since the total amount of the deduction for the contribution of capital gain property exceeded 30%.
See I.R.C. Section 170(b)(1)(D)(i)(II).
81. See I.R.C. Section 170(b)(1)(D)(ii); Treas. Reg. 1.170A-10.
82. See Hoyt, “Transfers from Retirement Plans to Charities and Charitable Remainder Trusts: Laws, Issues, and Opportunities,” 13 Va. Tax Rev. 641, 673-676 (Spring 1994) (describing in detail the requirements for a Charitable Remainder Trust).
83. See supra note 75.
84. Treas. Reg 1.664-1. Gain will be recognized upon receipt as either
ordinary income, capital gain, or tax-exempt income depending on the nature of the assets sold in the charitable remainder trust and the nature of any future income generated inside the trust. Id. When the charitable trust distributes cash of property to the beneficiary, the beneficiary will recognize ordinary income to the extent the trust had recognized prior ordinary income on the sale of assets and such ordinary income has not previously been distributed to the beneficiary. Id. However, to the extent the donor originally contributed a capital asset to the charitable remainder trust and the trust assets are invested in a way to minimize ordinary income, the distributions can then be characterized as capital gain.
85. For a charitable remainder unitrust, the taxpayer will receive a preset percentage (of no less than 5%) of the fair market value of the assets held in the trust valued each year. I.R.C. Section 664(d) (2). There are other types of charitable remainder trusts, such as a charitable remainder annuity trust with a fixed percentage based on the initial value of the contribution, although generally the charitable remainder unitrust is the preferred option to hedge against future inflation. See Price and Donaldson, Price on Contemporary Estate Planning, section 8.29 (2021).
86. See I.R.C. Section 664(d)(2)(A).
87. Depending on the length of the term selected, the size of the retained interest percentage, and the existing applicable federal rates at the time of creation, the tables in Treas. Reg. 1.664-4 will determine the value of the remainder interest and thereby the amount of the charitable deduction.
88. See I.R.C. Section 664(d)(1)(D) (noting the present value of the charitable interest must be no less than ten percent of the initial fair market value of the contribution).
89. See Buffett, “Comments by Warren E. Buffett in conjunction with his annual contribution of Berkshire Hathaway shares to five foundations,” Berkshire Hathaway Press Release (June 23, 2021) (noting that wealthy should “Leave the children enough so that they can do anything but not enough that they can do nothing”).
90. Rooney, “How the new estate tax rules could reduce charitable giving by billions,” The Conversation (April 13, 2018) (noting that a rise in the estate tax rate alone increases charitable donations).
91. One option for replacing the assets passing to charity is to use the some of the cash from a charitable remainder trust distribution or from the tax savings on the charitable gift to purchase life insurance to provide for the taxpayer’s family. To the extent life insurance is owned in an irrevocable life insurance trust where the insured retains no incidents of ownership then the proceeds will not be included in the taxpayer’s estate at death. See I.R.C. Section 2042(b).
92. See Stevens, supra note 24.
93. Id. at 54.
94. Id.
95. Id. at 55.
96. Id. at 56. Ideally the taxpayer would have previously created the entity and any controlling interests would be held by the taxpayer’s children or trusts for their benefit, but such appreciated property could also be contributed to a newly created entity. Id. In that case, however, steps should be taken to prevent the partnership assets from being included in the estate of the taxpayer under I.R.C. Section 2036. Id.
97. Id.
98. Id.
99. Id.
100. An entity, like any taxpayer, may create a charitable remainder trust. I.R.C. Section 7701(a)(1); see PLR 199952071 (Sept. 24, 1999); PLR 9512002 (Sept. 29, 1994); PLR 9205031 (Nov. 5, 1991). The only limitations on the creation of such a trust by an entity is that the term
Freedman Norman Friedland LLP lawyers address important issues of intellectual property for artists, including resale of their works, the extent of their interest in copyrights, and moral rights for visual artists. These issues are key in planning the estates of artists.
Intellectual property rights
Creator copyright
Does copyright vest automatically in the creator, or must the creator register copyright to benefit from protection?
Copyright generally vests in the creator once the work is fixed in a tangible medium of expression without the need for copyright registration. Registration, however, is a prerequisite to filing a lawsuit for copyright infringement. A copyright registration certificate may be presumptive evidence of ownership of a valid copyright. Further, for a copyright owner to be eligible for an award of statutory damages and attorneys’ fees, the registra-
tion must have occurred before the copyright infringement or within three months after the first publication of that work.
Copyright duration
What is the duration of copyright protection?
For works created on or after 1 January 1978, copyright protection extends from creation of the work and endures for a term consisting of the life of the author and 70 years after the author’s death. For joint works, the term of copyright is the life of the last surviving author plus 70 years. For an anonymous work, a pseudonymous work or a work made for hire, the copyright endures for a term of 95 years from the year of its first publication or a term of 120 years from the year of its creation, whichever is shorter. The term of copyright for pre-1978 works is complex and depends on several factors. Thus, an attorney should be consulted to determine duration of the copyright for these works.
Display without right holder’s consent
Can an artwork protected by copyright be exhibited in public without the copyright owner’s consent?
While the copyright owner has the exclusive right to display a work publicly, copyright law carves out a special limited exception (tied to the first sale doctrine) for the display of a copy of a work rightfully owned without the authority of the copyright
owner, to display that copy publicly, either directly or by the projection of no more than one image at a time, to viewers present at the place where the copy is located.
Reproduction of copyright works in catalogues and adverts
Can artworks protected by copyright be reproduced in printed and digital museum catalogues or in advertisements for exhibitions without the copyright owner’s consent?
An owner of copyrighted artwork (with some limitations, including the exception of a fair use) has the exclusive rights to reproduce the copyrighted work in copies and distribute copies of the copyrighted work. It is thus advisable and common practice that museums seek permission from the copyright owner in connection with the reproduction of images of the copyrighted work in the museum’s publications and marketing for exhibitions.
Copyright in public artworks
Are public artworks protected by copyright?
Public artwork, including ‘street art’, is afforded the same copyright protection as other artwork that is fixed in a tangible medium of expression.
Artist’s resale right
Does the artist’s resale right apply?
Although efforts have been made over several years to enact federal legislation providing for resale royalty rights, the United States does not recognise resale royalty rights. Under US copyright law’s first sale doctrine, once an original copyrightprotected work of authorship is sold, the buyer and all subsequent purchasers are free to resell that work (but not any underlying copyright rights in the work) without having to provide any compensation to the original artist or author. Artists may contract for resale royalty rights, which has recently become a more popular practice. NFTs configured through ‘smart contracts’, for example, may automatically pay out royalties to the original artist with every future sale of the NFT on a specific platform.
Moral rights
What are the moral rights for visual artists? Can they be waived or assigned?
The United States acceded to the Berne Convention for the Protection of Literary and Artistic Works, an international treaty that governs and protects moral rights (among others), in 1988. In 1990, Congress enacted the Visual Artists Rights Act of 1990 (VARA).
VARA offers an artist of a ‘work of visual art’ the right of attribution - specifically, the right to:
• claim authorship of that work;
• prevent the use of his or her name as the author of any work of visual art that he or she did not create; and
• prevent the use of his or her name as the author of the work of visual art in the event of a distortion, mutilation or other modification of the work that would be prejudicial to his or her honour or reputation.
VARA also provides the right of integrity, specifically the right to:
• prevent any intentional distortion, mutilation or other modification of the work that would be prejudicial to the artist’s honour or reputation; and
• prevent any destruction of a work of recognised stature, and any intentional or grossly negligent destruction of that work.
VARA rights extend for the life of the author for works created on or after its effective date, 1 June 1991, and for works created before 1 June 1991 to which the author still holds title on the same date, the life of the author plus 70 years. For joint works (two or more authors), VARA rights endure for the life of the last surviving author.
VARA rights may not be transferred but may be waived by a written instrument signed by the author.
Endnotes
1 Yaél M Weitz , Lawrence M Kaye and Kate Aufses
to protect themselves or embarrassment, not make their situation known.
• The client may be aware of the situation but be in denial of the gravity of it.
• The client may be aware of the situation but not anticipate the future changes or understand the magnitude of the problem. It is not a simple or obvious call as to what level a problem must attain to suggest that the affected person should not be named.
“The Mental Help Foundation highlights that many people are reluctant to talk about their mental health struggles due to fear of judgment, rejection, or misunderstanding. This stigma can lead to worsening symptoms, increased isolation, and, in some cases, tragic outcomes like suicide.”1
Client Discussion Questions for Consideration
When guiding a client on deciding on who to assign fiduciary roles to, the following questions ,may help the client evaluate each situation:
• How does this person handle stress?
• Can they manage family conflicts impartially?
• Do I trust their judgment and decision-making abilities?
• Have they shown integrity, even when it came at a personal cost?
• Can they resist undue influence or manipulation from others?
• Are they organized, deadline-driven, and willing to seek expert advice when needed?
• Would appointing this person as a fiduciary role harm them or their relationships with family members in any way?
For families where these considerations raise concerns, appointing a professional fiduciary, such as a bank, trust company, estate attorney, or individual professional trustee, may be a solution. Professional and fiduciaries remove emotional conflicts from the process, are more apt to make impartial decisions aligned with the estate plan, and alleviate the burden of legal and administrative responsibilities from grieving family members. This approach may minimize resentment and preserve family relationships, allowing loved ones to focus on healing rather than estate management. While hiring a professional may not be feasible or affordable for everyone, answering these key questions may help identify the person best equipped to handle these responsibilities. Thoughtful fiduciary selection may ensures that the client’s trusts and estate is managed effectively, their wishes are honored, and that their family relationships remain intact.
Mental Health or Addiction Issues Exacerbate Interpersonal Relationships
These issues are further complicated by the dynamics in families where one child has a history of mental health concerns. These relationships may already be strained, as siblings sometimes harbor resentment over the time, money, or attention that parents dedicated to helping the struggling child stabilize. Appointing this individual as executor could intensify existing tensions, potentially damaging the executor’s mental health and the last semblance of family relationships. Allowing an adult child with mental health concerns to grieve alongside their siblings, without the added burden of being an executor, might instead offer an opportunity for healing and support within the family.
Action Steps for Practitioners
A simple starting point is for practitioners to be certain that questions about mental health and addiction challenges appear in all estate planning questionnaires or checklists to solicit this information. Also, in light of the widespread prevalence of these issues, and the potential significant impact on a plan, these inquiries should be raised for every plan.
Drafting considerations should also contemplate these issues. If a fiduciary is not performing well, having a trust protector (or estate protector in the case of a will) authorized to remove a fiduciary for any reason could be useful to cost effectively and quickly remove a fiduciary whose mental health or addiction problem becomes apparent. A trust protector may do so without the cost, time delay, and contention of a court proceeding.
Consider the potential impact if not a fiduciary, but a powerholder given a limited or even general power of appointment over a trust, has or develops a mental health or addiction issue. Imprudent, or worse malicious, exercise of a power of appointment, could undermine an entire plan. Should a trust protector be given expanded authority to remove and replace powerholders?
But more is necessary. In many situations the trust protector serves in a passive manner only reacting if requested by someone to do so. Perhaps encouraging annual meetings of those involved with a trust, or some reporting or other involvement by the protector will increase the likelihood of a trust protector becoming aware of a situation sooner. So, there are three distinct phases at which practitioners can help protect a plan from these issues:
1. At the interview/intake phase.
2. At the drafting phase.
3. At the administration phase.
A More Detailed Look at Mental Health Challenges
Addiction and mental health challenges may affect fiduciaries or other persons involved in a client’s estate planning. When people think of mental health challenges, the typical stereotype is someone who is severely depressed, highly anxious, manic, psychotic,
vidual needs—ensuring that each child is nourished and cared for appropriately.
Similarly, when planning an inheritance and fiduciary roles, it’s important to consider each child’s unique circumstances, as well as the impact of power and responsibility on their own mental health, rather than applying a one-size-fits-all approach. What would it feel like for an older sibling to hold control over the housing and finances of a younger sibling? What would happen if the older sibling was only in charge of the real estate and decided to sell the house the younger sibling was living in and using drugs in when the parent died because the parent let the younger sibling move back in instead of living on the street as a consequence of their addiction? Thoughtful estate planning ensures that the power vested in each fiduciary is manageable and properly wielded and assets left behind truly support and empower beneficiaries in ways which align with their individual needs and situations.
Discretionary Trust for Heir with Mental Health or Addiction Challenges
For someone with a mental health disorder, which may impact their ability to make good decisions or manage money appropriately, a parent may consider creating a discretionary trust or appointing a professional third party to serve in fiduciary roles. A professional third-party fiduciary would be less impacted by the nature of family dynamics, the impact of making life and death decisions in stressful times, and would allow a family to bond in their grief instead of being divided by inserted power dynamics. Further, a discretionary trust could provide the child with the more severe mental health or addiction challenges with access to assets in a way which more flexibly provides for their care (and not subject, for example, to a health, education, maintenance, and support standard if that child were a trustee). This should better protect the child from moments where their judgment lapsed, their impulsiveness took over, or they became active in their addiction and preserve another sibling or relative from the stress of decision making, begging and vitriol from a begrudged child struggling who didn’t get access to money or assets outright, and the ongoing influence of power creating wedges in what might have been either a good or already strained relationship. For individuals who are more stable, they may even be appointed as a co-trustee along with an independent professional trustee in order to provide more autonomy and decision-making power while still providing guardrails and protection.
For individuals who are, or may in the future be, receiving public assistance, a discretionary trust with special needs provisions may still allow them to maintain access to the public benefits which support their daily needs. It is especially important that in such instances outright bequests be avoided as that may undermine the ability to continue receiving governmental benefits. For this type of supplemental or special needs trust (“SNT”) planning, it is imperative that the family consult with an attorney in their state who specializes in Medicaid and special needs planning to assure that the appropriate provisions are included in any trust document, and that they are informed of any other governmental
programs, and other steps that they might take. The technical requirements of an SNT are difficult nuances and laws for a family member to understand when acting in a fiduciary capacity and the impact of accidentally miss stepping and causing harm would also increase anxiety and stress in someone who already struggles with these symptoms.
Planning and Drafting Considerations To Address Mental Health and Addiction
Below are a few points to consider when designing and drafting for this purpose:
• Special consideration should be given if appointing people with known mental health or addiction challenges in fiduciary roles. If a person is being considered for a trustee position (or any fiduciary or non-fiduciary role) and it is known that they have an addiction or mental health challenge, careful evaluation should be made as to whether it is even appropriate to name them in such a role. But the unfortunate reality is that in many cases their status may not be knowable until an event occurs. Further, many people would be uncomfortable asking a family member or close friend they are seeking to name as a fiduciary in their estate plan about their past drug, alcohol or mental health history. In choosing these roles, people do not typically assess for historical trauma where their desired fiduciary may have seen another loved one die or lost someone in a traumatic manner or how appointing someone as the trustee of a relative would bring them back to flashbacks of relapses and near-death experiences related to overdosing. Even asking, they might rightfully fear, would be taken as offensive and dissuade their accepting.
• As all practitioners know, selecting the right executor is crucial to ensuring an estate is managed effectively and according to the testator’s wishes. Similarly, the persons appointed in a revocable, or irrevocable, trust to make legal, financial and other decisions will have a crucial role in carrying out the settlor’s wishes. The agent under a durable power of attorney for financial matters, and the agents under health care documents, all have vital roles to serve and naming a person that faces mental health challenges could undermine critically important personal decisions. There may be, at first look, little difference to naming a person serving in one of those roles who later becomes physically disabled, versus naming someone who later develops (or had then merely exhibits) addiction or mental health issues. But there may be practical differences, in part due to the societal taboo on discussing addiction and mental health challenges, or the difficulty of corroborating someone as being incapacitated because of a mental health issue that is not pronounced, but which more subtly affects their conduct. While dealing with a trustee or other person holding powers or a position in an estate planning who becomes physically incapacitated or dies is relatively common, addressing mental health challenges that may
impact their performance may be much more difficult. Even professional advisers may have less experience in identifying and understanding these challenges. So it may be, practically speaking, more difficult to know if action is necessary or how to respond. For example, is the mental health challenge one that, even if difficult for that person serving, a material impediment to their serving?
• While individuals with mental health challenges may have the best intentions, they might face unique obstacles which could make it difficult to fulfill the demanding responsibilities of serving as a trustee or in another vital position. Some of these challenges may include, in addition to the challenges that their mental health issues create for them, the stress of administrative and financial duties, increased vulnerability to emotional stress and external pressures, higher levels of impulsivity at times, periods of disturbed cognitive functioning, the potential for manipulation and bias, and fluctuating periods of instability, especially in high stress times. In regard to medical, legal, and financial decisions, the pressure and weight of the resulting consequences of their decisions could be too much for them to bear.
• A trustee is tasked with administrative and financial duties such investing trust assets, filing paperwork such as income tax returns related to the trust, polling beneficiaries for relevant information, making distribution decisions, informing beneficiaries, and so on. They also have to keep accurate and detailed records of all transactions related to the trustee and handle any legal challenges to the trust, or conflicts among beneficiaries. The stress of administrative and financial duties can be overwhelming for anyone, but particularly for individuals managing mental health concerns such as anxiety, depression, or cognitive disruptions (these may include executive functioning challenges related to things like Attention Deficit/ Hyperactivity Disorder or learning disabilities). Fiduciaries must navigate deadlines, handle legal and financial tasks, and make decisions under high-pressure conditions, which can exacerbate mental health symptoms and increase the risk of mistakes. Additionally, people with mental health challenges may be more affected by family conflict or external pressures, making it difficult to remain impartial. They might struggle to set boundaries or to make decisions aligned with the estate plan’s intentions when faced with relational consequences, such as the threat of abandonment or tension with other family members. Similar issues can arise with the personal representative appointed to manage an estate under a will (or as a successor trustee who may do so under a revocable trust).
• For a person appointed to the medical positions under health care documents such as a health care proxy (medical power of attorney) or HIPAA release (that authorizes communications with medical providers and access to medical records), many of the decisions could have dire consequences that are profound, and which the person serving as agent might have to live with for the rest of their lives. Medical power
of attorney grants an individual the authority to make healthcare decisions on behalf of someone who is unable to do so, ensuring their wishes are honored and their medical needs are met. This can include decisions about treatments, surgeries, or end-of-life care. Imagine the impact of making a decision that could leave a parent in a coma for years or a decision that could end their life?
• A financial power of attorney permits the named agent to act on behalf of another in legal matters, such as signing documents, paying bills, filing income tax returns (although the IRS power of attorney form may have to be addressed), managing contracts, or handling legal disputes, to ensure the individual’s financial and legal affairs are addressed.
• Many people also use revocable trusts to address these issues of disability or illness. In both cases, if the fiduciary involved has or develops addiction or mental health issues, they could neglect their duties or worse siphon funds of the person who appointed them to support a drug, shopping or gambling habit, or merely to be dissipated during a manic episode, etc. This is why is so important to build checks and balances into these common and ubiquitous estate planning documents. Too often that is not done and unless the appointed agent or successor trustee’s misdeeds become sufficiently extreme to be noticeable, they may not be discovered, or even if discovered significant financial damage may have been done. One possible means to address this could be to use an institutional trustee. While many people are loath to use institutional trustees, and some are precluded because of minimum asset size requirements, some recount horror stories of institutional trustee lack of care or attention, or worse, the reality is that institutional trustees have policies and procedures, and internal checks and balances, to minimize the risk of trustee misconduct. Individual trustees, who often have little training, no formalized policies, typically have few if any checks and balances. The issues may, as explained above, be mitigated by having the legal document appoint a trust protector who can monitor the trustee and remove and replace them if their conduct is sub-par. If a trust officer working for an institutional trustee has addiction or mental health challenges that affect their performance, someone else on the trust company or bank team would hopefully notice that and act to remove that person. An obvious issue with using an institutional trustee is access. Unless the value of the assets in the trust, or the overall family relationship, exceed the threshold required by that institution, they will not be willing to serve. So, using an institutional trustee, while perhaps a good option for wealthier families, is likely inaccessible for the significant majority of Americans. So, what can be done? There are other means of incorporating checks and balances on trustees (and others serving). Consider the following:
• Appoint co-trustees who must act unanimously. In this way, if one co-trustee has or develops issues that affect their per-
formance, the opportunity for them to neglect their duties or dissipate assets may be limited by the involvement of a second co-fiduciary.
• Appoint a person in a position to monitor the trustee. That could be a monitor under a durable power of attorney, an estate protector under a will and a trust protector under a trust.
• When an individual financial fiduciary is serving consider mandating in the governing instrument that duplicate copies of all trust financial records (e.g., bank and brokerage accounts, records of disbursements, etc.) automatically sent to a designated third party, e.g., the family attorney or CPA. That person could serve as a monitor of trust activities. This could be formalized with the trust protector receiving such reports. Require that annual (or more frequent) financial reports be issued to specified people so that others can observe what is happening so that if there is an issue it may be identified more quickly.
A problem with each of the above approaches is that it adds cost and complexity to the plan, but the most difficult problem may be identifying additional people to serve in these capacities.
There is another twist on these concepts, any fiduciary could be subjected to pressure, even abuse, by a beneficiary with an addiction or mental health disorder, and may have difficulty with the frequency and escalation of the beneficiary’s behaviors. Many individual trustees could at some point out of frustration with the abuse, resign or cave in to the pressure and give that beneficiary the funds they are demanding. Even institutional trustees may not be immune to these issues as the behaviors create liability concerns, and drain administrative resources and time. Especially if something bad happens as a result of caving to the pressure, the fiduciary who is closer in relationship to the beneficiary may experience trauma, self-blame, and a variety of other negative impacts to their own mental health.
Additional Questions to Suggest Clients Consider in Evaluating Fiduciaries
Most people who make create an estate plan think through who would be appointed as their fiduciaries. Although there’s not a standard of how these decisions are made universally, most people reflect on people they know within a certain proximity, the people who they trust to make decisions in alignment with their values, and the anticipation that the people appointed would make decisions in line with the wishes they have for themself. Within this conversation, additional questions arise, such as:
• How often are the people chosen in these roles informed prior to a need to make decisions?
• How often are these decisions updated based on evolved circumstances?
• How frequently is someone able to say “no” when they don’t
feel they are the right person but don’t want to let down a family member who chose them?
• For people who have the financial resources to hire a third party like a trustee, is that option discussed?
• What if financial resources aren’t available and they must pick a family member who has a history of mental instability and/or addiction?
Estate planners have an ability to help people analyze the different ways to make these decisions, including encouraging the client to ask the potential fiduciaries directly, playing out theoretical scenarios with them, and giving the potential fiduciaries an opportunity to decline and not accept the responsibility because of a feeling of perceived guilt or pressure.
Can and Should Fiduciaries Be Required to Submit to Testing?
Requiring that individual fiduciaries submit to testing as a condition of serving is unusual, may dissuade anyone from serving, and may raise a host of difficulties. Should this even be considered?
The advance discussions clients should have with potential fiduciaries, as discussed in the preceding section, might also allow estate planners to create creative solutions like drug testing and psychological testing for appointed fiduciaries that have a history of addiction and mental illness so there are safeguards in place for people who have a higher likelihood of mental instability in certain stressful periods of their life.
The possible benefits of including additional measures such as drug testing and psychological testing prior to a fiduciary stepping into their assigned role and making decisions is clear. A psychological evaluation may ensure mental and emotional stability of the individual making the decisions at the time. It allows the psychological evaluator to anticipate whether any prior mental health conditions or current mental health symptoms may negatively influence a person’s decision making and have a negative influence on both them and the incapacitated person. These measures also protect the incapacitated individual, can establish concrete evidence and a process for mental fitness which could reduce family conflict and legal disputes down the road, increases accountability and trust, and prevents financial exploitation due to impaired decision-making. Drug testing an individual prior to their assuming a fiduciary role, and/or prior to making certain designated material decisions, may prevent potentially reckless and impulsive decision making due to intoxication which may create irreversible consequences, it could also save the person who is impaired from living with the guilt of making reckless choices with lifelong ramifications.
As is obvious, there are numerous possible negative implications of psychological evaluations and drug testing prior to a fiduciary beginning to serge, or prior to making specified critical decisions. In instances where immediate decisions need to be made, the
testing creates delays in decision-making and just as a drug test is subject to false positives, a psychological evaluation is subject to clinical bias as well as temporary and immediate stress factors. Psychological testing is subject to the condition or state that fiduciary is in at that time and most people in that position are grieving, scared, and in a place of uncertainty. Finally, additional costs and administrative burden may make it difficult to execute both psychological evaluations and drug tests on a regular basis.
Having these measures in place may not be necessary for people who have a longstanding history of sound judgment and decision-making. For individuals in recovery from an addiction or mental health disorder, where relapse, especially in times of heightened stress, is more common, additional safeguards should be put in place when a family member feels they have no other option for naming a fiduciary. Adding these directives to the estate plan could limit the long-term negative consequences for both the person writing their estate plan and the person appointed in a fiduciary role. Prior to appointing the person, discussions could be had about their comfort level in making these decisions, playing out scenarios to see how they might anticipate feeling making life or death decisions, even knowing your client’s wishes, and what long-term effect they might anticipate if a decision they made ultimately resulted in a costly financial result, or in the case of health care decisions, a death. The estate planner could have a list of proposed questions for their client to take home and ask everyone they’re considering naming as a fiduciary, write down their answers, and reflect more intentionally on the ramifications of each fiduciary appointment.
Case study of a Fiduciary with Addiction Issues
Mark, a 67-year-old man, suffered a severe stroke and is now incapacitated, unable to communicate or make medical decisions for himself. Three years ago, while in good health, he appointed his niece, Sarah, as his medical power of attorney (HCPA) because he trusted her judgment and felt she understood his values and wishes. At the time, Sarah had been in recovery from opioid addiction for five years, and Mark saw her as a responsible and capable decision-maker. However, as Mark’s condition worsens, his doctors are now seeking guidance on potentially life-altering medical interventions, including the possibility of placing him on a long-term ventilator or pursuing high-risk surgery with uncertain outcomes.
When Mark made his initial decision, he believed Sarah was in a good place in her recovery. She seemed to move forward successfully in her ability to cope, manage family relationships, and stay employed. Mark believed this time in her recovery was different. In fact, he even allowed her to stay with him after her last rehab stay because she had burned so many bridges with her parents. This is the time they became closer, and without kids of his own, he believed she could be the right person to make these medical decisions for him if something were to happen in his future.
Unbeknownst to Mark, Sarah relapsed several months prior to his stroke and she is struggling to maintain stability in her
recovery. Because Mark was so proud of her and so supportive in her last round of getting sober, she did not tell him about the relapse because she didn’t want to let him down. Right now, she is experiencing increased emotional distress, compounded by the pressure of making critical medical choices for her uncle. Family members are noticing that she appears overwhelmed, avoids detailed medical discussions, and has had difficulty attending meetings with doctors consistently. Her mother, Mark’s sister, is particularly concerned that Sarah may not be in the best position to make rational, well-informed decisions, fearing that her judgment may be clouded by her current struggles with addiction. That being said, she has no concrete evidence to confront Sarah. Other relatives are divided—some believe Sarah should still be allowed to fulfill the role Mark entrusted to her, while others worry that she may unintentionally make decisions based on emotional distress rather than medical reasoning and Mark’s wishes.
As Sarah grapples with this enormous responsibility, medical professionals are urging the family to provide clear direction. While Mark’s advance directive offers some guidance, there are several decisions that require nuanced judgment, including whether to pursue aggressive treatment or prioritize comfort care. The family must now consider whether Sarah, given her current struggles, is still the best person to act as Mark’s medical proxy. If she is unable to fulfill the role effectively, the family may need to seek legal intervention to reassign decision-making authority to another trusted relative or petition the court for guardianship.
This difficult situation highlights both the emotional ways which drive people to appoint medical power of attorney and other fiduciary roles and a need for safeguards to verify someone’s competency to fulfill the role in the moment a crisis emerges, forcing them to step up and make critical decisions.
Conclusion
Mental health and addiction issues are common. Far more common than most people would anticipate. While there are no failproof steps to take to address these in planning, this article has suggested that being more deliberate in guiding clients on these considerations, and perhaps modifying a few common planning and drafting approaches, may provide some additional protection for the client, the fiduciary or beneficiary affected by mental health or addiction problems, and the family as a whole.
Endnotes
1. “Breaking the Silence: The Urgent Need to Talk About Mental Health,” https://mentalhelpfoundation.org/breaking-the-silence-the-urgent-need-to-talk-about-mental-health/, accessed April 28, 2025.
Don’t Get Burned After the Southern California Fires
By Linda S. Koffman1
This article provides an overview of some of the State and local government responses to this disaster, as well as describing property tax relief on fire-damaged properties.
The devastating wildfires sweeping through portions of Los Angeles County have left over 12,000 homes, schools, businesses, and other structures completely destroyed. Thousands of families and businesses have been displaced, which is exacerbating an already strained housing market. This article provides an overview of some of the State and local government responses to this disaster, as well as describing property tax relief on fire-damaged properties.
Government Responses
State Response: Some key State legislation and Executive Orders issued by the State include:
Mortgage Relief – California Assembly Bill 238, also referred
to as the Mortgage Deferment Act, would provide essential financial relief to the victims of the Los Angeles County wildfires (including the Palisades and Eaton fires). It is intended to provide financial relief to those who have lost their homes or livelihood to wildfires by allowing borrowers to request mortgage payment forbearance for up to 360 days, specifically in two increments of 180 days each. To effectuate a request, as currently drafted, the borrower must submit a request for forbearance to the borrower’s mortgage loan servicer and affirm that the borrower is experiencing financial hardship due to the wildfire disaster. Upon receipt of this request, the lender must provide forbearance for up to 180 days, which may be extended for an additional period of up to 180 days at the request of the borrower. During the forbearance period, this act prohibits a lender from initiating foreclosure, moving for a foreclosure judgment or order of sale, or executing a foreclosure-related eviction or foreclosure sale.
Price Gouging/Cap on Residential Rent Increases – California Assembly Bill 246 would prohibit landlords in Los Angeles County from increasing rental rates above what was charged on January 7, 2025, for properties impacted by the Los Angeles County wildfires. This restriction applies to all residential properties and would remain in place for 12 months after the emergency is declared over. In addition, it addresses price gouging by prohibiting price increases to ten percent (10%) above pre-emergency prices for essential goods and services during a state of emergency.
Coastal Commission and CEQA Suspension – Through Governor Newsom’s Executive Order No-20-25, Governor Newsom expanded on previous executive orders to (a) waive permitting requirements under the Coastal Act and CEQA by clarifying the scope of the waivers; (b) accelerate the rebuilding of recently constructed homes by allowing them to be rebuilt to previously approved specifications; (c) extend deadlines for construction permits to 3 years for properties or facilities substantially damaged or destroyed in the fires; (d) accelerate access to original plans held by local planning and building departments by waiving the requirement that the local building department seek the consent of the specific professional who signed the original plans; and (e) extend deadlines for local jurisdictions to update their zoning ordinances to implement housing elements such as minimum density and development standards, which allows local government staff to focus fully on issuing permits for rebuilding efforts. This Executive Order is already in effect.
Eviction Moratorium – Through Executive Order N-11-25, landlords may not evict a tenant for sharing housing space with a wildfire victim who has lost his/her home. This Executive Order is already in effect.
Local Response: Some key measures issued by Los Angeles County Board of Supervisors (the “Board”) include:
Adjustments to Short Term Rentals – The Board removed the 90-night cap on un-hosted stays and removed restrictions on vacation rentals and accessory dwelling units.
Eviction Protection – Landlords may not evict tenants who offer housing to individuals or pets displaced by the fires.
Property Tax Relief
Property Tax Reduction - Individuals and companies experiencing property damage or destruction due to the recent fires may be eligible for property tax relief in the form of a reduction in the property’s assessed value. This reduction is anticipated to continue while the property remains in fire-damaged condition. Property tax relief is available for taxable property (including real property, business equipment, fixtures and manufactured homes) that is subject to local property taxation by the Los Angeles County Tax Assessor (“Tax Assessor”). Eligibility requirements for tax relief require the fire damage or destruction to the qualified property to be at least $10,000 of the current fair market value. A qualifying claim must be filed with the Tax Assessor within twelve months of damage or destruction. If the Tax Assessor grants relief, the property will be reassessed downward to reflect its condition, and that reduced value will apply retroactively from the month in which the damage occurred until the property is fully repaired or rebuilt. If the property is partially repaired or rebuilt as of any January 1st date, the taxable value will be adjusted upward to reflect the repairs completed as of that date. If the property is rebuilt entirely, the property’s prior assessed value will be restored if it is rebuilt in a similar manner.
Property Tax Deferral – In addition, if the property owner has filed a claim for reassessment, the property owner may also request deference of the next installment of property taxes occurring immediately after the property was damaged. This allows the County Tax Assessor to reassess the property because of the damage and then issue a corrected property tax bill. To be eligible for deferral, the damage must be at least $10,000 or 10% of its fair market value, whichever is greater. Tax deferral is not available where property taxes are paid through an impound account. This specific claim form is due to the County Assessor by April 10, 2025.
Limited Suspension on Penalties, Costs or Interest – Through Executive Order N-10-25, Governor Newsom suspended the imposition of penalties, costs, or interest for failure to pay property taxes for properties located in certain zip codes. The suspension extends until April 10, 2026. This suspension does not apply to taxes that were delinquent as of January 7, 2025 (the date of the first fire) and does not apply to any property for which taxes are paid through an impound account.
Transfer Base Year Value to Replacement Property – Certain damaged property may also qualify for a transfer of the damaged property’s base year value to another property within Los Angeles County, or even another county in California. The following are three different types of base year value transfers, each with different eligibility requirements:
1. Same County Base Year Value Transfers for Any Property Type. Under California Revenue and Taxation Code Section 69, owners of certain taxable real property damaged or destroyed in the wildfires may transfer their base year value to a comparable replacement property in the same county. To qualify, the physical damage must be more than 50% of the property’s fair market value immediately prior to the governor-proclaimed disaster and the replacement property must be acquired or newly constructed in the same county within five (5) years of the damage. Importantly, this transfer path is available for any type of real property, not just a primary residence. The replacement property must be the same property type and be comparable in size, utility, and function. Once the base year value is transferred to the replacement property, the damaged property will be reassessed at the lower of its fair market value or the existing factored base year value. If reconstruction on the damaged property subsequently occurs, the new construction will be assessed at fair market value.
2. Intercounty Base Year Transfers on Principal Residences to Certain California Counties California Revenue and Taxation Code Section 69.3 permits a resident whose principal residence was substantially damaged or destroyed by the wildfires to transfer that property’s base year value to a comparable replacement principal residence acquired or newly constructed in a different county within California if that alternative county has adopted an ordinance accepting such base year value transfers. As of the date of this article, fourteen (14) counties in California accept base year value transfers from other
California counties. To qualify for transfer, the property must be damaged to more than 50% of its fair market value immediately before the disaster and the replacement property must be acquired or newly constructed within three years of the date of the casualty. The fair market value of the replacement principal residence must be equal or lesser value to the property which is being replaced (105% if within the first year after the casualty, 110% if within the second year and 115% if within the third year). Once the base year value is transferred to the replacement property, the damaged property is reassessed at the lower of fair market value or the existing factored base year value. If reconstruction of the damaged property subsequently occurs, the new construction will then be assessed at fair market value.
3. Intercounty Base Year Transfers on Principal Residences to Any California County. California Revenue and Taxation Code
Section 69.6 allows a resident whose principal residence was substantially damaged or destroyed to transfer the factored base year value to a replacement principal residence in any other California County. To qualify, the principal residence must be damaged or destroyed due to wildfires or a governor proclaimed natural disaster, and the physical damage must amount to more than 50% of the property’s fair market value immediately prior to the casualty. The damaged primary residence must be sold in its damaged state and the replacement primary residence must be purchased or newly constructed within two years of the date of sale of the damaged property. It is important to note that the replacement primary residence can be of any value. However, if the replacement property is more than a certain percentage of the fair market value of the original property, then the transferred factored base year value will be adjusted according to a specified formula.
Given the extensive and complex legislation that is developing in response to the recent devastation, it is critical to contact a qualified real estate and tax attorney to make sure you don’t get “burned” after the Southern California wildfires.
Endnotes
1. Linda S. Koffman is a Partner with Smith, Gambrell & Russell, LLP in Los Angeles, California. More about Linda can be found here: https://www.sgrlaw.com/attorneys/koffman-linda/
Disposal of Federally Owned Properties
In addition to early lease terminations, the administration also announced its plan to dispose of hundreds of federally owned properties. On March 4, the GSA published a list of over 440 federally owned properties determined to be “noncore assets” slated for disposition. Of those properties identified as “noncore assets,” over 100 were in the greater Washington DC area. By the next day, the GSA had removed the list of these noncore assets for disposal, but weeks later it began adding buildings back to the list. GSA has been relisting properties in tranches under what it calls “accelerated disposition”, and as of April 24, 2025, there are several DC-area buildings back on the list.
Notwithstanding GSA’s desire for “accelerated disposition”, GSA must follow the process required by federal law when disposing of federally owned property. Before the GSA may dispose of federal property for fair market value, it must first offer the property to other federal agencies that may have a need for the property. Federal regulations require GSA to circulate a formal notice to the federal landholding agencies, which then have a short time period to express their written interest, followed by 60 days to submit a formal transfer request. If a federal agency identifies a need, the property can be transferred to that agency.
Surplus Property
If no other federal agency expresses a need, then the property is declared “surplus” and may be made available to state and local governments or eligible nonprofit organizations for transfer as a “public benefit conveyance” under the Federal Property and Administrative Services Act of 1949 (FPASA) and/or the McKinney-Vento Homeless Assistance Act (the “McKinney-Vento Act”). Under the McKinney-Vento Act, use of surplus federal property for homeless assistance takes priority over all other potential public benefit conveyances. Once GSA declares a property as surplus, it notifies the U.S. Department of Housing and Urban Development (HUD), which then reviews the property to determine its suitability for use by homeless service providers. If HUD determines that a property is suitable for homeless assistance, then HUD posts the property on its list of available properties for 60 days. HUD then reviews applications from eligible organizations (including state and local governments) and if an applicant meets the eligibility criteria, the property may be transferred in fee or leased to the applicant at no cost. Any fee simple conveyance will be subject to a deed covenant requiring that the property be used solely for homeless assistance for a period of 30 years – otherwise the property will revert back to the government.
If surplus property is not transferred for homeless assistance, then it can be considered for other public benefit conveyances under FPASA. FPASA created the General Services Administration and provided a process for the disposition of surplus federal property to non-profit educational and public health institutions for health and education purposes at a discount of up to 100% of the fair market value of the property. To qualify for this
type of public benefit conveyance, the non-profit must meet specific eligibility requirements and submit an application containing a detailed plan outlining how they intend to use the property, together with proof of the organization’s capability to manage and maintain the property effectively. The plan must detail a qualifying public benefit, such as public health or education, and demonstrate the organization’s ability to execute that plan. If GSA determines that the non-profit organization is eligible and the proposed use meets the public purpose criteria, the property is transferred to that organization. The deed will typically contain a covenant that the property must be used for the approved public purpose for 30 years or revert back to the government. After the property is transferred, the GSA or relevant federal agency may monitor the use of the property to ensure it continues to serve the intended public purpose. If a non-profit organization fails to comply with the terms of the transfer, the GSA has mechanisms in place to enforce compliance, including requiring corrective action or even reversion of the property back to the government. Under the applicable regulations, public benefit conveyances are subject to the discretion of the GSA administrator based on a highest and best use analysis (one exception being, under the McKinney Vento Act, surplus property must first be made available for serving the homeless).
Public Sale
If the surplus property is not transferred pursuant to a public benefit conveyance, GSA can then dispose of the property through a competitive sale to the public for fair market value. But before putting the property on the market, GSA must follow several key steps. First, GSA must comply with the National Environmental Policy Act (NEPA) by conducting an environmental assessment or environmental impact statement. Second, if the property is historic or located in an historic district, GSA must comply with the National Historic Preservation Act (NHPA), consulting with the applicable State historic preservation office and other stakeholders as necessary. Third, GSA must obtain an independent appraisal to determine the fair market value of the property in order to set the minimum price for the sale. Finally, GSA reviews title, survey and the zoning and land use status to inform potential buyers of any restrictions.
GSA may use several methods to sell the property, including open auction, sealed bid auction or negotiated sale. In the two (2) auction scenarios, properties are posted on the GSA auction site, along with all information necessary to bid on a property. Interested parties are invited to attend open houses, tour and inspect the property before the deadline for offers. GSA reviews all bids to ensure they meet the terms and conditions of the sale, including financial capability and compliance with any special requirements. The property is awarded to the highest responsive bidder.
Negotiated Sale
Federal law allows the GSA to enter into a negotiated sale pro -
How to Write Effective Prompts for AI Models
By Samuel Dangremond
This article discusses how generative AI is transforming legal work and highlights strategies—such as clear prompts, role instructions, examples, and corrections—that help lawyers use tools like ChatGPT and Claude more effectively for research, drafting, and document review.
Artificial intelligence (AI) – once considered a fad – is here to stay, whether lawyers like it or not. And whether or not law firms fully embrace it, there is a feeling that they may otherwise be left behind.
Although generative AI cannot replace the critical thinking and relationship-based work that are critical to lawyers’ jobs, it does offer effective assistance with tasks like summarizing articles and cases and analyzing and proofreading documents. AI is often a good starting point or springboard for beginning research, or a refresher on topics and forms you may not have seen for some time.
Generative AI takes its name from the fact that AI models like ChatGPT and Claude generate answers in responses to prompts from users. Although using these models may seem straightforward at first (akin to typing a string of words into a Google search without much thought), to truly take advantage of what generative AI models can offer requires some skill in terms of crafting effective prompts. Here are some takeaways to assist in writing effective prompts for AI to ensure you get your desired answers:
Be Clear and Concise
A good prompt tells the AI model what you want. Leave out any unnecessary words of the prompt, which ensures the AI model will deliver the most on-point results.
For example, if you want a summary of the felony murder rule, write: “Summarize the felony murder rule.” Doing so in ChatGPT provides a concise paragraph summary of the rule: “The felony murder rule holds that if a death occurs during the commission of a serious felony (like robbery, arson, or burglary), the defendant can be charged with murder, even if they did not intend to kill anyone. The rule applies to those involved in the felony, including accomplices, and the death must happen during or in the immediate aftermath of the felony. The key aspect of the rule is that intent to kill is not necessary for a murder charge.”
Committee Calls June 2025
Central Time (US and Canada)
HOSPITALITY, TIMESHARING AND COMMON INTERESTS DEVELOPMENT GROUP
June 3, 2025 10:00 AM Central Time (US and Canada)
The Commercial Real Estate Transactions Group is a very active group that analyzes transactional and ownership issues that confront commercial real estate attorneys when dealing with such things as land transfers, construction, servitudes, title insurance, property and liability insurance, and ownership of commercial real estate. The group is comprised of the following six committees, each of which focuses on one of the foregoing topics: (i) Design and Construction; (ii) Easements, Restrictions and Covenants; (iii) Green and Sustainable Transactions; (iv) Property, Casualty and Other Non-Title Insurance; (v) Purchase and Sale; and (vi) Title Insurance and Surveys.
The Commercial Real Estate Transactions Group has monthly meetings on the first Wednesday of each month at 2:00 (eastern) where we often have a substantive report from one of our 6 committees on a topic or case of interest relevant to that committee. The various committees also provide numerous continuing legal education (CLE) for the Group’s members covering basic concepts in each of the following areas: (a) “purchase and sale agreements,” (b) finance document and due diligence,” (c) “leases and easements” and (d) “construction contracts.” The group regularly provides CLE at the RPTE Section’s National Conference.
We invite you to join the Commercial Real Estate Transactions Group in order to receive calendar invitations about our monthly meetings, upcoming CLE and other events.
Our Group provides value to members by helping them to stay current on the many and changing legal rules that apply to their clients’ plans, especially ones relating to qualified plans, medical and other welfare plans, and nonqualified deferred compensation plans. Our Group also focuses on fiduciary responsibilities related to the operation of plans and the formation and termination of benefit plans, and litigation involving this area of practice. www.americanbar.org/groups/real_property_trust_estate/about/committees/ employee-plans-executive-compensation/
Residential, Multi-Family and Special Use Group
Although a diverse group, this Group’s committees share the common thread of dealing with residential properties and issues that pertain to all types of residential properties. The Group is led by Sarah Cline, Chair, Principal at Miles & Stockbridge, P.C., and Cynthia Langelier Paine, Vice Chair, Partner at BlankRome.
The Group has four committees:
Single-Family Residential, led by James Marx, Chair, and Erin August and Arielle Comer, Vice-Chairs
This committee deals with all aspects of the development, purchase, financing and ownership of single-family residential property, including regulations affecting residential settlements and best practices for representing consumers in residential transactions.
Affordable Housing Committee, led by Kristin Elizabeth Niver, Chair, and George Weidenfeller and Erin Lapeyrolerie, Vice-Chairs
This committee focuses on all aspects of the development, acquisition, financing and ownership of affordable housing, and the governmental programs and policies that support it, including the Community Reinvestment Act. Many of the committee members are involved with HUD programs, and the committee provides a forum to provide commentary for the development and administration of these programs, as well as to simplify the process involving these governmental programs.
Multi-Family Residential, led by Chelsea Patricia Fitzgerald, Chair, and Ashley Haun and Alyssa Dunn, Vice-Chairs
This committee deals with all aspects of the development, sale, financing and ownership of multi-family residential property, including the impact of FHA, the Americans with Disabilities Act, and HUD programs. This committee focuses on the legal issues faced by landlords, property managers and tenants of rental housing and apartments.
Senior Housing and Assisted Living, led by Gregory Limoncelli, Chair, and Colin Gaynor and Jane E. Sternecky, Vice-Chairs
The Group is proud to have sponsored two informative and timely programs during this bar year, which are now available on demand:
On Wednesday, March 26, 2025, the Group hosted a discussion with representatives of the ABA Commission on Homelessness and Poverty. We discussed the state of housing and homelessness in a post-pandemic/post-Grants Pass world. We also learned what the Commission is currently working on in that area and how RPTE members can engage with the Commission. The recording is available here, and the passcode to access the recording is: &872Tw8+.
On Friday, December 6, 2024, the Group hosted a presentation by Eric Oberer, Maryland State Counsel for First American Title Insurance Company, to discuss the current number one claim for title insurance companies and largest current transactional risk in real estate – seller fraud. The program discussed seller impersonation, vacant land risk, targeted properties, specific examples of seller fraud, ways to detect fraud, and ways to avoid fraud. This one is a must-watch for all real estate practitioners who act as title and escrow agents, and those representing purchasers. Learn about the latest trends and tricks employed by bad actors, and how to protect yourself and your clients! The recording is available here, and the passcode to access the recording is: ij9Rp9m+.
The ABA Section of Real Property, Trust and Estate Law Fellows Program encourages the active involvement and participation of young lawyers in Section activities. The goal of the program is to give young lawyers an opportunity to become involved in the substantive work of the RPTE Section while developing into future leaders.
Each RPTE Fellow is assigned to work with a substantive committee chair, who serves as a mentor and helps expose the Fellow to all aspects of committee membership. Fellows get involved in substantive projects, which can include writing for an RPTE publication, becoming Section liaisons to the ABA Young Lawyers Division or local bar associations, becoming active members of the Membership Committee, and attending important Section leadership meetings.
CALLING ALL LAW STUDENTS!
The Section of Real Property, Trust and Estate Law is now accepting entries for the 2025 Law Student Writing Contest. This contest is open to all J.D. and LL.M students currently attending an ABA-accredited law school. It is designed to encourage and reward law student writing on real property or trust and estate law subjects of general and current interest.
1st Place
$2,500 award
2nd Place
$1,500 award
3rd Place
$1,000 award
n Free round-trip economy-class airfare and accommodations to attend the RPTE National CLE Conference. This is an excellent meeting at which to network with RPTE leadership! (First place only.)
n A full-tuition scholarship to the University of Miami School of Law’s Heckerling Graduate Program in Estate Planning OR Robert Traurig-Greenberg Traurig Graduate Program in Real Property Development for the 2025-2026 or 2026-2027 academic year.* (First place only.)
n Consideration for publication in The Real Property, Trust and Estate Law Journal, the Section’s law review journal.
n One-year free RPTE membership.
n Name and essay title will be published in the eReport, the Section’s electronic newsletter, and Probate & Property, the Section’s flagship magazine.
Contest deadline: May 31, 2025
Visit the RPTE Law School Writing Competition webpage at ambar.org/rptewriting.
*Students must apply and be admitted to the graduate program of their choice to be considered for the scholarship. Applicants to the Heckerling Graduate Program in Estate Planning must hold a J.D. degree from an ABA-accredited law school and must have completed the equivalent of both a trusts and estates course and a federal income tax course. Applicants to the Robert Traurig-Greenberg Traurig Graduate Program in Real Property Development must hold a degree from an ABA-accredited law school or a foreign equivalent non-US school.
How do I submit an article for consideration?
Email either a paragraph on a potential topic or a polished draft – the choice is yours – to the Editor, Robert Steele, at rsteele@ssrga.com , and either our Real Estate Editor, Cheryl Kelly, at CKelly@ thompsoncoburn.com , or our Trust and Estate Editor, Keri Brown, at keri.brown@bakerbotts.com
Do I need to have my topic pre-approved before I write my submission?
Not required, but the choice is yours. We welcome topic suggestions and can give guidance at that stage, or you may submit a detailed outline or even a full draft. You may even submit an article previously published (discussed below) for our consideration.
Do citations need to be in formal Bluebook style?
eReport is the most informal publication of the Section. We do not publish with heavy footnotes and all references are in endnotes. If there are citations, however, whether to the case you are writing about, or in endnotes, they should be in proper Bluebook format to allow the reader to find the material. Certainly you may include hyperlinks to materials as well.
Can I revise my article after it is accepted for publication?
While we do not encourage last minute changes, it is possible to make changes since we work on Word documents until right before publication when all articles are converted to pdf format for publication.
What is your editing process?
Our Editor and either the Trust and Estate Editor or the Real Estate Editor work together to finalize your article. The article and the style are yours, however, and you are solely responsible for the content and accuracy. We will just help to polish the article, not re-write it. Our authors have a huge variety of styles and we embrace all variety in our publication.
Do I get to provide feedback on any changes that you make to my article?
Yes. We will email a final draft to you unless we have only made very minor typographical or grammatical changes.
Will you accept an article for publication if I previously published it elsewhere?
YES! This is another unique feature of eReport. We bring almost 17,000 new readers to your material. Therefore, something substantive published on your firm’s or company’s website or elsewhere may be accepted for publication if we believe that our readers will benefit from your analysis and insight. In some cases, articles are updated or refreshed for eReport. In other cases, we re-publish essentially unchanged, but logos and biographical information is either eliminated or moved to the end of the article.
How quickly can you publish my article?
Since we publish quarterly, the lead time is rarely more than two months. If you have a submission on a very timely topic, we can publish in under a month and present your insights on a new topic in a matter of weeks.
