A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance to practitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members!
Tuesday,
Register for each webinar at http://ambar.org/ProfessorsCorner
Register for each webinar at http://ambar.org/ProfessorsCorner
Register for each webinar at http://ambar.org/ProfessorsCorner
Tuesday, March 11, 2025 12:30-1:30 pm ET
Tuesday, April 8, 2025 12:30-1:30 pm ET
Tuesday, January 9, 2024 12:30-1:30 pm ET
DEATH AND TAXES: DYNASTY TRUSTS AND WEALTH IN AMERICA
ACCELERATING AND DE-ACCELERATING THE MORTGAGE NOTE
A LAWYER’S GUIDE TO THE NATIONAL ZONING ATLAS
Tuesday, May 14, 2024 12:30-1:30 pm ET
Tuesday, March 14, 2024 12:30-1:30 pm ET
Moderator: SHELBY D. GREEN, Elisabeth Haub School of Law, Pace University
Panelists: JAMES C. SMITH, University of Georgia
DAVID ZIVE, Ballard Spahr
DANIEL DURRELL, Locke Lord TBA
REGULATION AND A FUNDAMENTAL RIGHT TO PRIVATE PROPERTY
TO BE ANNOUNCED
Tuesday, June 11, 2024 12:30-1:30 pm ET
Tuesday, February 13, 2024 12:30-1:30 pm ET
Tuesday,April 11, 2024 12:30-1:30 pm ET
A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance to practitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members!
Register for each webinar at http://ambar.org/ProfessorsCorner
A Publication of the Real Property, Trust and Estate Law Section | American Bar Association
EDITORIAL BOARD
Editor
Edward T. Brading
208 Sunset Drive, Suite 409
Johnson City, TN 37604
Articles Editor, Real Property
Kathleen K. Law
Nyemaster Goode PC 700 Walnut Street, Suite 1600 Des Moines, IA 50309-3800 kklaw@nyemaster.com
Articles Editor, Trust and Estate
Michael A. Sneeringer
Brennan Manna Diamond 200 Public Square, Suite 1850 Cleveland, OH 44114 masneeringer@bmdllc.com
Senior Associate Articles Editors
Thomas M. Featherston Jr.
Michael J. Glazerman
Brent C. Shaffer
Associate Articles Editors
Robert C. Barton
Travis A. Beaton
Kevin G. Bender
Maria Z. Cortes
Jennifer E. Okcular
Heidi G. Robertson
Melvin O. Shaw
Bruce A. Tannahill
Departments Editor
James C. Smith
Associate Departments Editor Soo Yeon Lee
Editorial Policy: Probate & Property is designed to assist lawyers practicing in the areas of real estate, wills, trusts, and estates by providing articles and editorial matter written in a readable and informative style. The articles, other editorial content, and advertisements are intended to give up-to-date, practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.
The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either the American Bar Association or the Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered the rendering of legal or ethical advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are intended for educational and informational purposes only.
Chris Martin 410.584.1905 chris.martin@mci-group.com
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All correspondence and manuscripts should be sent to the editors of Probate & Property
Probate & Property (ISSN: 0164-0372) is published six times a year (in January/February, March/ April, May/June, July/August, September/October, and November/December) as a service to its members by the American Bar Association Section of Real Property, Trust and Estate Law. Editorial, advertising, subscription, and circulation offices: 321 N. Clark Street, Chicago, IL 60654-7598.
The price of an annual subscription for members of the Section of Real Property, Trust and Estate Law is included in their dues and is not deductible therefrom. Any member of the ABA may become a member of the Section of Real Property, Trust and Estate Law by sending annual dues of $95 and an application addressed to the Section; ABA membership is a prerequisite to Section membership. Individuals and institutions not eligible for ABA membership may subscribe to Probate & Property for $150 per year. Requests for subscriptions or back issues should be addressed to: ABA Service Center, American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598, (800) 285-2221, fax (312) 988-5528, or email orders@americanbar.org.
Periodicals rate postage paid at Chicago, Illinois, and additional mailing offices. Changes of address must reach the magazine office 10 weeks before the next issue date. POSTMASTER: Send change of address notices to Probate & Property, c/o Member Services, American Bar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60654-7598.
WHAT HAPPENS IN VEGAS...
37th Annual RPTE National CLE Conference
April 30 to May 1, 2025 | Aria Resort & Casino
Get ready for the ABA Section of Real Property, Trust, & Estate Law 37th Annual RPTE National CLE Conference—your chance to elevate your practice, expand your network, and stay ahead of the curve.
Join us at the Conference and learn from industry leaders on the latest legal trends, connect with top professionals and peers from across the country and gain tools and strategies to bring back to your practice.
This isn’t just a conference, it’s where the future of real property, trust, and estate law comes to life.
Stay tuned for registration details, keynote speakers, and session previews are on the way in early February!
Save the Date and Join Us!
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.
*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.
FELLOWSHIP OPPORTUNITY
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.
ambar.org/rptefellows
UNIFORM LAWS UPDATE
The Uniform Custodial Trust Act—A UTMA for Adults
The Uniform Transfers to Minors Act (UTMA) is one of the most well-known and successful of the uniform acts, adopted in all 50 states plus the District of Columbia and the US Virgin Islands. UTMA accounts are widely used to transfer property to a custodian to manage for the benefit of a minor. Nearly every bank and brokerage firm in the United States offers UTMA accounts to its customers as an easy way to create a custodial account in accordance with any state UTMA statute.
The UTMA has a lesser-known cousin for adult beneficiaries. In the 20 jurisdictions where it has been adopted, the Uniform Custodial Trust Act (UCTA) provides a similarly simple way to cre -
Uniform Laws Update provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.
plan. The act allows adults to transfer property to a custodial trust to benefit themselves or others. The grantor designates a custodian and optional successors to manage the property for the adult beneficiary or beneficiaries.
ate a custodial account for the benefit of an adult. It is designed to provide a statutory inter vivos trust for individuals who are typically not affluent and do not need a more extensive estate
Uniform Laws Update Co-Editor: Benjamin Orzeske,Chief Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602.
A custodial trust has many potential uses. It could provide for the future management of assets in the event of the adult beneficiary’s incapacity. It could also allow a parent of a developmentally disabled adult child to provide for the child’s future needs. It could even be a vehicle for someone serving in the military or temporarily leaving the country to place property with a custodian for management without giving up beneficial ownership.
The process for creating a UCTA account will be familiar to anyone who has set up a UTMA account for the benefit of a minor. The owner of the property simply transfers it to a custodian “as custodial trustee for (name of
beneficiary) under the (name of State) Uniform Custodial Trust Act.” Different types of transfers to custodians are allowed, including by will, trust, deed, or designation in an insurance policy.
Like a UTMA account, a UCTA account is registered using the beneficiary’s tax ID number, and any income, including capital gains, is taxed to the beneficiary. Both the UTMA and UCTA similarly protect third parties who deal with custodians and limit the liability of custodians and beneficiaries.
But there are also some important differences. Unlike a UTMA account, which automatically terminates upon the beneficiary’s attainment of a specified age (usually 18 or 21 years), a UCTA account has an indefinite duration. An adult beneficiary with the legal capacity to make decisions may order termination of the custodial trust at any time, as can a conservator for an adult beneficiary who subsequently becomes subject to conservatorship.
Adult beneficiaries under the UCTA can also direct the custodian in managing their property, and custodians must keep good records and account to the beneficiaries at least annually. Without any direction, the custodian must manage the custodial property under the prudent investor standard but is not limited by any other legal restrictions placed on fiduciaries.
UCTA accounts may not be appropriate for complex estates or affluent persons. Still, they provide a valuable alternative to a living trust for others without access to comprehensive estate planning services.
UCTA accounts are currently available in the twenty jurisdictions that have adopted this uniform law, as shown on the map on this page. Other states may consider enacting legislation to provide this option. n
The Editorial Board of Probate & Property magazine is interested in reviewing manuscripts in all areas of trust and estate or real property law. Probate & Property strives to present material of interest to lawyers practicing in the areas of real property, trusts, and estates. Authors should aim to provide practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.
Manuscripts should be submitted to the appropriate articles editor:
FOR REAL PROPERTY: FOR TRUST & ESTATE:
Kathleen K. Law
Michael A. Sneeringer Nyemaster Goode PC Brennan Manna & Diamond 700 Walnut Street, Suite 1600 200 Public Square, Suite 1850 Des Moines, IA 50309-3800 Cleveland, Ohio 44114 kklaw@nyemaster.com masneeringer@bmdllc.com
On our website (www.americanbar.org/groups/real_property_ trust_estate/publications/probate-property-magazine) click on the links under the “Resources” section for complete author guidelines and submission requirements.
If you have any questions, please email erin.remotigue @americanbar.org.
Deciphering Tax Provisions in a Partnership or LLC Operating Agreement
By Philip R. Hirschfeld
As the tax laws affecting partnerships have become increasingly complex, limited partnership or limited liability company (LLC) operating agreements that have attempted to keep abreast of these changes have become increasingly difficult to decipher. They are therefore incomprehensible to many lawyers and their clients. Section 704(c) of the Internal Revenue Code of 1986, as amended (the Code), requires that allocations of taxable income, gain, loss, and deductions must have substantial economic effect (SEE) to be respected. (Failure to comply with the SEE regulations may permit the IRS under I.R.C. § 704(c) to reallocate these tax items in a way that reflects the partners’ interest in the partnership (PIPs).) Extensive regulations provide a list of requirements for meeting this requirement, for example, Reg. § 1.704-1, which includes requiring
Philip R. Hirschfeld is
counsel at Buchanan Ingersoll & Rooney in New York, New York.
He is the co-vice-chair
of
the RPTE Groups and Substantive Committees standing committee and vice-chair of the Special Investors Group.
that liquidating distributions be made in accordance with partners’ capital accounts. Reg. § 1.704-1(b)(2)(ii)(b)(2). Client concerns that these requirements may distort their business arrangements led to adoption of targeted tax allocation provisions as an alternative way to make tax allocations, a method not yet sanctioned by the IRS. After explaining these tax allocation requirements and provisions, this article will also explain the need to require distributions to partners to ensure they have cash to pay their taxes and required provisions to grapple with recently adopted enhanced IRS audit powers. In this article, any reference to partnerships includes LLCs that are usually treated as partnerships for tax purposes.
Tax Allocations
Reasons for the Tax Allocation Rules. Partnerships are not taxpayers. Each year, a partnership’s taxable income, gain, loss, and deductions are allocated to its partners, who then include those allocations on their own tax returns and pay any required tax that is due. I.R.C. § 702(a) (a partner gets Schedules K-1, K-2, and K-3 setting forth detailed information). Some partnerships provide that all contributions to the partnership and all partnership distributions are made among the partners based on a fixed percentage interest assigned to each partner. In such cases, tax allocations could be made based on those same percentage interests over the life of the partnership, which is referred to as “straight-up” allocation that may satisfy the SEE requirement.
Many partnership agreements, however, have more complex distribution provisions. Distributions may provide that a preferred return is first paid to the cash-contributing partners and then excess cash flow is distributed among all partners based on certain sharing ratios that may change over time. Straight-up allocations do not work for these more complex deals.
In the past, some partnerships also disproportionately allocated substantial tax losses to certain partners, which allocations had no economic reality. For example, a tax-exempt entity and
a taxable investor formed a partnership with each having a 50 percent requirement to contribute capital to the partnership and a 50 percent right to all distributions. Because the taxexempt partner could not use tax losses generated in the early years of the partnership’s existence, tax losses would be allocated 100 percent to the taxable investor, but with no change in how the cash flow may be shared. This special tax loss allocation did not alter how partnership distributions were to be made (i.e., they were still made 50–50 between the two partners), so this special allocation had no basis in economic reality. These actions were abusive and required action by the IRS.
Adoption of Tax Allocation Regulations. In the late 1980s, the IRS found a way to stop these abuses by adopting detailed regulations creating guidelines for when allocations will have SEE. Reg. § 1.704-1. If SEE is lacking, the IRS can reallocate taxable income and loss in a way that matches the PIP. In the example discussed above, these rules require losses to be allocated 50–50 (that is, the IRS would assert each partner had a 50 percent PIP and tax losses should be made in accordance with that 50 percent sharing ratio) unless the partner getting the loss allocation takes some risk that this allocation will alter the 50–50 sharing of distributions upon liquidation of the partnership, as discussed below.
Partnership tax losses that satisfy the SEE rules also are subject to added tax hurdles before they can be used to offset other taxable income. Tax losses can be used to offset non-partnership income only to the extent of the partner’s basis for the partnership interest. I.R.C. § 704(d)(1) (for example, if a partner has a $10,000 basis for its partnership interest and the partnership allocates a $100,000 loss to that partner, only $10,000 of that loss can be used to offset non-partnership income; the remaining $90,000 of losses are suspended and carried over to the next year, when they can be used if added basis is then created (such as by contributions to the partnership or partnership income from the next year
When targeted tax allocations are adopted, liquidating distributions usually no longer follow capital account balances.
allocated to that partner)), (d)(2). The inclusion of a partner’s share of partnership debt in the partner’s basis for its partnership interest often means this rule is not an obstacle to using tax losses. Id. § 752(1). For example, in a 10-partner partnership, each partner initially contributes $10,000 cash to the partnership for a 10 percent partnership interest, which gives each partner a $10,000 basis for its partnership interest. The partnership then borrows, on a nonrecourse basis, $900,000 and uses that borrowed money and the $100,000 aggregate cash contributed by all its partners to buy a $1,000,000 rental real estate property. Each partner is allocated 10 percent of the $900,000 nonrecourse debt, or $90,000, which can then be added to the basis of each partner’s interest in the partnership. As a result, the basis of each partner’s interest in the partnership is now $100,000 ($10,000 attributed to the cash capital contribution and $90,000 attributed to its share of partnership debt). In this case, a $100,000 loss can be allocated to a partner who has a $100,000 basis and without running afoul of this basis limitation rule. Also, the passive activity loss rules (I.R.C. § 469) and the at-risk rules (id. § 465) may limit use of partnership tax losses. The PAL rules may apply to a real estate partnership and, in that case, allow only passive losses to offset passive income
and not active business income or portfolio income, which is investment income such as dividends, interest, and capital gains. A person may be a partner in two real estate partnerships, however, and have a $10,000 loss from one partnership and $10,000 worth of income from another partnership. If the passive loss rules apply to both partnerships, then the $10,000 passive loss can offset the $10,000 passive income. For real estate partnerships, the at-risk rules may not limit use of losses if the partnership has only qualified nonrecourse financing, which is often the case. Id. § 465(b)(6). There is also a broadly drafted partnership anti-abuse rule that is an added weapon the IRS may apply to an abusive situation. Reg. § 1.701-2. Despite these limitations, tax losses are still valuable to many investors.
Basic Requirements to Comply with Regulations. The SEE regulations create three requirements for allocations to have SEE:
1. A partnership maintains capital accounts;
2. The capital accounts determine how cash and other partnership property is to be distributed to the partners when the partnership liquidates; and
3. The partnership agreement contains either (a) a deficit restoration obligation or (b) a qualified income offset (QIO) provision.
Reg. § 1.704-1(b)(2)(ii)(b), (d). To comply with the first requirement, a capital account is maintained for each partner. Id. § 1.704-1(b)(2)(iv). The capital account of a partner is increased by (1) the amount of cash and the fair market value (FMV) of property contributed by the partner to the partnership and (2) such partner’s share of partnership taxable income and gain allocated to the partner. A capital account of a partner is decreased by (1) the amount of cash and the FMV of property distributed by the partnership to the partner; and (2) such partner’s share of partnership taxable loss and deductions allocated to the partner. These are the primary ingredients of a capital account, but other adjustments also are made because property contributed to the partnership is reflected in the capital account at its FMV, rather than its tax basis, and book depreciation rather than tax depreciation is used in making future adjustments to capital accounts.
In the past, to comply with the second requirement, partnership agreements generally included a provision that distributions made in liquidation of the partnership were made in accordance with the partners’ capital. These agreements provided that the partnership will liquidate after it has sold off all or substantially all of its assets. As discussed below, when targeted tax allocations are adopted, liquidating distributions usually no longer follow capital account balances.
With respect to the third requirement, a deficit restoration obligation provides that upon liquidation of the partnership, a partner who has a deficit in the partner’s capital account (i.e., the capital account is a negative number) must contribute cash to the partnership equal to such deficit, and further requires that such cash would then be distributed to other partners having positive capital accounts. In practice, most partners reject having a deficit restoration obligation since such a provision may require the partner to go out of pocket and contribute cash to the partnership.
The QIO provision was included as an alternative requirement that does
not expose the partner to economic risk. A QIO provision requires a partner who “unexpectedly” receives an adjustment, allocation, or distribution that causes or increases a deficit balance in such member’s capital account (in excess of any limited amount of such deficit that such member is obligated to restore) to be allocated income and gain in an amount and manner sufficient to eliminate such deficit balance as quickly as possible. Reg. § 1.704-1(b)(2) (ii)(d). In practice, the QIO is routinely included in partnership agreements. Adoption of a QIO also requires the agreement to generally prevent a loss from being allocated to a partner if that partner’s capital account would then go negative while another partner’s capital account is positive, subject to certain other adjustments.
Allowable Special Allocations of Tax Losses Under the Regulations. Based on the SEE regulations, if a special allocation of a tax loss is desired, then that
loss must reduce that partner’s capital account, and that capital account must govern how liquidating distributions are made. The effect of these rules is that a partner receiving a special allocation of loss must be subject to some real economic loss that may result in liquidation of the partnership, as illustrated below.
A and B form a partnership. Each partner contributes $500 to the partnership in which they are equal 50–50 partners. The partnership uses the $1,000 cash to buy depreciable property. In the first year, the partnership incurs a $100 taxable loss because of $100 of depreciation claimed on its assets. That depreciation lowers the tax basis of the property from $1,000 to $900. If that $100 loss is specially allocated to B, then the capital account of B gets reduced to $400 (i.e., $500 cash contribution minus $100 loss) yet A’s capital account stays at $500.
If the partnership sells its assets for
$900 cash at the start of the second year, no taxable gain will be recognized on the sale because the $900 sale price matches the $900 adjusted tax basis of the property. If the partnership liquidates, then the $900 of cash liquidating distributions must follow capital accounts so that A gets $500 cash yet B only gets $400 cash. B was subjected to the $100 tax loss in the first year, but B then gets $100 less cash on liquidation of the partnership, so the allocations have SEE and are respected by the IRS. If the liquidating distribution did not follow capital accounts and the partners split the cash distributed in the liquidation in equal shares (50–50) so that A and B each get $450 cash, then the special allocation of the $100 loss to B did not have SEE. In that case, the IRS would reallocate that $100 loss in the first year equally between the partners to match their 50 percent interest in the partnership. As a result, $50 of the loss would be reallocated to A and only
AN ESTATE PLANNER’S GUIDE TO QUALIFIED RETIREMENT PLAN BENEFITS
By Louis A. Mezzullo
the remaining $50 allocated to B. After that reallocation, the capital accounts of both partners would be $450 (i.e., $500 initial cash contribution minus $50 loss), which matches the cash that each is to receive upon liquidation of the partnership.
Compliance with the SEE regulations thus exposes a partner who receives a special allocation of loss to the risk of getting less cash on liquidation of the partnership. That risk may be reduced if there is an expectation that the property will be sold in the future at a taxable gain (that is, a price higher than its tax basis). In that case, the partnership agreement can contain both (1) a special allocation of loss to a partner and (2) a special allocation of gain on a sale of partnership property to the partner who enjoyed the earlier special allocation of tax loss up to the amount of the earlier tax loss.
In this example involving a special loss allocation in the first year, if the property was sold for $1,000 at the start of the second year, then the partnership recognizes a $100 taxable gain (i.e., $1,000 sale price minus $900 tax basis). The partnership agreement could specially allocate the $100 gain to B to offset the effect of the first year $100 loss allocation. B’s capital account would then be increased to $500 ($400 at the start of year two increased by the $100 gain). If the partnership then liquidated, then the $1,000 cash could be shared $500 to A and $500 to B as that would match their capital accounts.
If the property is sold for more than $1,000 (such as $1,200), then there is $300 taxable gain to allocate on the sale ($1,200 sale price minus $900 basis). The first $100 of gain would be allocated to B to offset the prior $100 loss allocation, and the excess $200 gain would be allocated in the basic 50–50 sharing ratio so that $100 is allocated to A and $100 is allocated to B. In that case, the capital accounts of A and B would each be $600 after taking into account these gain allocations, and the cash distributed in liquidation could be split $600 to A and $600 to B to match their capital accounts.
Concerns with Technical Compliance
with the Regulations. These SEE tax allocation provisions caused two main concerns for investors.
First, tax was shaping how cash would be distributed in liquidation, because the regulations require that capital accounts, as determined under tax rules, determine how liquidating distributions are made. For many investors, their investment in the partnership was not driven by taxes or a desire to enjoy tax losses but rather by economics. If these tax allocations did not work properly, investors may not get the economic returns on their investments that they expected.
Second, even in deals that did not have any special allocations of tax losses, many partnerships contain complex distribution provisions. With this added complexity in how cash is shared comes a matching complexity in how taxable income, gain, loss, and deductions are shared among the partners, which led to so-called waterfall allocations, which are a series of steps in how to allocate income and loss. For example, taxable income first can be allocated to partners entitled to a preferred return on their capital, and thereafter, taxable income may be allocated reflecting rights to further distributions. These waterfall allocations can become even more complex because an allocation of taxable income should not be made to a partner to reflect a cash distribution made to a partner that is intended to be a return of invested capital. Those waterfall tax allocations affect capital accounts, which in turn governs the cash the investors get when the partnership is liquidated.
For example, the business deal may be that partnership distributions (that is, cash flow from operation of the real estate project or from its sale) are shared as follows:
1. First, 99 percent goes to the limited partners and 1 percent to the general partner until the limited partners get a return of their invested capital;
2. Second, 90 percent goes to the limited partners and 10 percent to the general partner until the
limited partners get a return equal to twice their invested capital; and
3. Third, all excess is allocated 80 percent to the limited partners and 20 percent to the general partner.
The resulting tax allocation provisions can contain several matching levels of how tax allocations are made that may use a 99–1 percent ratio, a 90–10 percent ratio, and an 80–20 percent ratio or some other ratio. Since these tax allocations are reflected in capital accounts, every investor (or counsel) must carefully review these tax allocation provisions to make sure they reflect the economic deal of the partners and do not distort it.
Alternative-Targeted Tax Allocations.
As a result, many clients who had no intention to avoid paying taxes wanted to (1) eliminate the requirement to have liquidating distributions made in accordance with capital accounts; (2) shorten the tax allocation provisions; and (3) ideally, do both. The “targeted” tax allocation provision was the way found to address those concerns. Rather than having detailed steps on how taxable income and loss may be allocated, the basic tax allocation provision is reduced to one paragraph, which generally reads as follows:
Partnership Profit or Loss for any fiscal year (or portion thereof) shall be allocated in a manner so as to cause the Partners’ ending Capital Accounts (after adjusting for such allocations) to equal the amount they would receive if the Partnership were to sell all of its assets for their book value, pay all Partnership liabilities and liquidate pursuant to the liquidation provisions set forth in this Partnership Agreement.
In summary, this targeted tax allocation provision requires that at the end of each year, tax allocations for that year are made such that, after taking these allocations into account in computing capital account balances, those adjusted capital account balances (i.e., the target) will equal what the partners
are to receive under the basic distribution provisions of the partnership agreement assuming (1) all partnership properties are sold at their book value; (2) all partnership liabilities are paid; and (3) any remaining cash is distributed to the partners in accordance with how distributions are to be made when the partnership liquidates. Use of book value does not require the partnership to compute and obtain an appraisal to determine the FMV of its properties; rather, the partnership uses the book value of its assets that are maintained on its financial records, which simplifies the computation.
A favorable effect of the targeted tax allocation provision is that the partnership agreement does not provide that liquidating distributions are made to match capital accounts. Rather, the agreement has a clear direction regarding how cash is to be distributed in liquidation of the partnership that does not rely on tax concepts; this approach can make clients feel more comfortable that their partnership agreement matches their economic expectation. This approach, however, does not comply with the regulatory requirement for liquidating distributions to follow capital accounts, and the IRS has not yet made any announcement as to whether targeted allocations may be respected. Nonetheless, these targeted allocations may be respected because the tax allocations are to match up with the intended cash distributions; therefore, there is real economic significance to this provision that should have SEE or, alternatively, reflect the PIPs.
Targeted tax allocations put pressure on the accountants that prepare and file the partnership’s tax return as they are not given clear step-by-step directions as to how to allocate tax items. Each year, the accountants must go through the task of making sure they apply the tax allocations correctly so that the capital accounts wind up at the targeted level. If the accountants make an error, then the IRS can correct the tax allocations. By contrast, if capital accounts governed how liquidating distributions are made, then the IRS may accept those tax allocations without
A favorable effect of the targeted tax allocation provision is that the partnership agreement does not provide that liquidating distributions are made to match capital accounts.
question, but the capital accounts may be at a level that does not match the economic deal of the partners and may distort liquidating distributions. For many investors, the risk of an IRS audit and a possible tax adjustment is of less concern than the risk of getting cash coming out of the partnership in the wrong manner if capital accounts determine how cash is to be distributed on liquidation of the partnership.
Targeted capital accounts are not perfect for every deal. For example, if there are pension fund investors in a real estate partnership, those investors generally want the partnership to avoid generating unrelated business taxable income (UBTI), which is taxable to those investors despite their general tax exemption. Although use of leverage by the partnership to acquire its property may generate UBTI, there is an exemption from UBTI for pension fund investors and certain other taxexempt entities if the tax allocations satisfy the “fractions rule” set forth in I.R.C. § 514(c)(9)(E) and the tax allocations have SEE. In that case, targeted tax allocations likely do not work to satisfy this requirement, and liquidating distributions should be made in accordance with capital account balances.
Although it is possible to specially allocate taxable losses among the partners (as discussed earlier), the partnership agreement generally will have to provide that liquidating distributions are made in accordance with capital
accounts to ensure that special loss allocations are respected. Also, targeted tax allocations may need to be supplemented to address what happens when property is contributed to a partnership and the FMV of the property on the date of contribution does not equal its tax basis. In that case, I.R.C. § 704(c) and the regulations thereunder add another set of special allocation rules that need to be addressed. For example, if a partner leaves the partnership before year-end, there is a need to close the books of the partnership and apply targeted allocations at that time, which gets complex.
Tax Distributions
After the end of the year, a partner gets Schedules K-1, K-2, and K-3 from the partnership stating the partner’s share of partnership income, gain, loss, or deductions for that year, and the partner must then pay any tax due. However, that partner may not have received any cash distribution from the partnership and must then pay out of pocket the cash needed to pay taxes on any income or gain allocated to the partnerj\. This concern is especially important for minority partners, who often have no control over whether distributions will be made by the partnership.
To ensure each partner has cash to pay taxes, the partnership agreement should require the partnership to make annual cash distributions to partners
to give them cash to pay their taxes (tax distributions). The tax distribution will typically equal the amount of taxable income allocated to a partner multiplied by the effective federal, state, and local tax rates applicable to the partner. There are several issues that should be considered in drafting a tax distribution provision:
• The determination of the effective tax rate applicable to each partner can be complex and is dependent upon the circumstances of each partner. Rather than determine the actual rate that applies to each partner, an effective tax rate should be assumed for all partners (such as 40 percent or 45 percent), which is subject to adjustment if there is a material change in tax rates.
• Often, tax losses may be generated during start-up, and taxable income may be generated in later years. Rather than determine tax distributions based on current income, tax distributions may take into account tax losses from earlier years and start only whenaggregate taxable income and losses since formation of the partnership become positive. For example, in year one, a tax loss of $100 is allocated to a partner. In year two, $150 of income is allocated to that partner. Rather than have a tax distribution in year two
based on $150 of income, the tax distribution could be based on only $50 of income ($150 – $100). The $100 loss from year one should be available as a carryover loss to year two or, if used in the first year to offset other income, saved taxes in that first year that should be considered.
• Although taxes of an individual are usually due by April 15 of the following year, estimated taxes are due on a quarterly basis (on April 15, June 15, and September 15 of the current year and January 15 of the following year). As a result, tax distributions based on estimates of taxable income should be considered, which can be made a few days prior to the time to make estimated taxes (e.g., 5 to 15 days prior to the due date).
• Tax distributions also must take into account that sometimes loan agreements or other agreements with third parties may restrict the partnership’s ability to make distributions. Also, the managing partner may need the flexibility to make tax distributions only to the extent of available cash flow and also permit cash accumulations to maintain reasonable working reserves. Further, if a partner has not made a required capital contribution, a right of setoff against tax distributions to be made to
such partner is fair.
• Lastly, tax distributions also should be credited against regular distributions to be made to partners.
Tax Audit Provisions
The Bipartisan Budget Act of 2015 (BBA) dramatically overhauled the rules applicable to audits of partnerships. Pub. L. No. 114-74, 129 Stat. 584 (Nov. 2, 2015). The BBA’s new centralized partnership audit regime generally provides for determination of adjustments (and assessments and collections of tax attributable to such adjustments) at the partnership level. The centralized partnership audit regime is effective for tax years beginning on or after January 1, 2018.
Before the BBA’s new audit regime, an IRS audit of a partnership had the potential to result in a disallowance of tax losses claimed by a partnership or an increase of taxable income of the partnership. But the IRS was then generally forced to collect any unpaid taxes from each of the partners, which severely restricted the ability of a partnership tax audit to actually collect unpaid taxes. By contrast, the BBA audit regime provides that once the IRS has issued a Notice of Final Partnership Adjustment, the partnership must now pay the taxes due directly to the IRS, subject to certain limited exceptions. I.R.C. § 6221(a). The most notable exception that eliminates the need for the partnership to pay the tax assessment applies if the partnership makes a “push-out” election, which shifts the responsibility to those persons who were partners for the year to which the tax adjustment relates. Id. § 6226(a). If a person becomes a partner in an existing partnership that may be subject to audit for a prior year, it is generally advisable to request that the partnership make the push-out election. If the election is not made and the partnership must pay the tax assessment, then that newly admitted partner is bearing some of the cost of that tax assessment that relates to a time period before becoming a partner. The one downside of making the election is
that the interest rate for which past tax and penalties are to be collected will be the corporate rate, rather than the individual rate, regardless of the type of partner. Reg. § 301.6226-3(c). This interest rate will be calculated as the short-term applicable federal rate plus five percent (versus the three percent used for individuals).
Another major change is that to ensure the IRS has a single point of contact with the partnership to handle a tax audit, a partnership representative must be appointed to deal with the IRS in the audit. If that partnership representative is not an individual, a designated individual must then be appointed to deal with the IRS. I.R.C. § 6223(a); Reg. § 301.6623-1(b)(3)(ii). (Pre-BBA law provided for appointment of a tax matters partner (TMP) to deal with the IRS on audits, but the TMP had far less powers. For partnerships that were in existence before 2018, the TMP may still be relevant for audits of a pre-2018 year. For the partnership, this point of contact has the important power to settle the audit with the IRS.)
These new audit rules make it important for the partnership agreement to incorporate a tax audit provision that should address several issues, including:
• Making the appointment of the
partnership representative and designated individual (referred to collectively as the PR), including powers to remove and replace such persons or appoint replacements once they leave.
• Requiring the PR to inform the partners (or at least the managing partner) of the start of an audit and progress of that audit.
• Requiring the PR to consult with the partners (or the managing partner) and get their consent before the PR settles any material tax assessment.
• Addressing whether certain elections should be made by the PR, such as the election to not be subject to these new rules, which is only available to certain partnerships having 100 or fewer partners, I.R.C. § 6221(b) (the election to not be subject to the BBA rules is available only if all the partners are either individuals, C corporations, foreign entities that would be treated as a C corporation if they were domestic S corporations, or estates of deceased partners; if any partner is itself a partnership, the election out is not available), or the pushout election to have the partners rather than the partnership pay
the resulting tax assessment. Id. § 6226(a) (which was discussed earlier).
• Providing for reimbursement of expenses incurred by the PR in connection with the audit and permitting the hiring of attorneys or accountants to conduct the audit.
• Providing for indemnity of the PR except for actions taken that constitute gross negligence.
Conclusion
Tax allocation provisions can become very complex. Although targeted tax allocations may not be the perfect fit for all situations, they can be a good practical choice to reflect the tax requirements and the business deal of the partners. In addition, adoption of tax distributions and audit provisions is also appropriate. The bottom line is that a tax advisor may need to be consulted to incorporate these provisions, but when a meeting with that adviser takes place, real estate lawyers can now have a better understanding of what the tax advisor is recommending and ensure tax does not distort their client’s business deal or leave their client shortchanged if the client must pay taxes or deal with a tax audit. n
KEEPING CURRENT PROPERTY
CASES
COTENANTS: Contributing cotenant may not obtain prejudgment interest in partition action. Sisters Lyon and Martin inherited property from their father. Neither had ever lived on the property, so they agreed to sell the property after making certain renovations and improvements. They agreed that Lyon would perform most of the labor to save money. After the relations between the sisters deteriorated, Martin filed for partition. Lyon counterclaimed, requesting an assignment of the property to her in exchange for her payment to Martin of the value of Martin’s share. Lyon also requested that Martin pay for half of Lyon’s expenditures for maintenance and improvements plus prejudgment intereston these expenses. The trial court determined that Lyon would take title to the property upon payment of Martin’s share of the determined net value of the property but denied the request for prejudgment interest, explaining that the expenses were not reasonably ascertainable because they were not supported by the evidence presented. Lyon appealed, and the supreme court affirmed, but on different grounds. The court explained that prejudgment interest is granted in two kinds of cases: when expressly provided for in a contract or promissory note and when awarded as damages for breach or default in the detention of money. Although partition is a statutory right held by all cotenants, neither injury to a party nor a showing of monetary loss or damages is an element of such action. Thus, partition awards do not trigger prejudgment interest. The court rejected
Keeping Current—Property Editor: Prof. Shelby D. Green, Elisabeth Haub School of Law at Pace University, White Plains, NY 10603, sgreen@law.pace.edu.
Contributor: Prof. Darryl C. Wilson.
Keeping
Current—Property offers a look at selected recent cases, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.
Lyons’s claims that Martin’s untimely payments for her share of the expenses harmed her by depriving her of the time value of her money, stating that damages for such harm are not an available remedy under the partition statute. Instead, the statutory remedies available to cotenants under statute are partition in kind, partition by sale, or assignment and a buy-out of the other party. Allowing Lyon to recoup the time value of her monetary contributions in prejudgment interest would effectively give her more than her fair share of the equity in the property. Martin v. Lyon, 2024 Vt. LEXIS 74 (Vt. Nov. 1, 2024).
COTENANTS: Action for partition is subject to defense of unclean hands. Jeffcoat and Perkins, an unmarried couple, lived together in a house in Charleston purchased by Jeffcoat in 2000, which he conveyed to himself and Perkins “jointly with rights of survivorship, and not as tenants in common.” Perkins began suffering from dementia in 2009. In 2015, her only child, Williams, moved from Alabama to be Perkins’s caregiver. Williams was added to Perkins’s bank account and used funds for Perkins’s medical care but also for Williams’s personal expenses. In June 2015, Williams indicated she was taking Perkins to a medical appointment but actually took her to Alabama, where the two lived until Perkins died later that year. In Alabama, Williams filed an action for guardianship and conservatorship without notifying
Jeffcoat, who stated he was unaware of Williams’s whereabouts as Perkins refused his repeated requests for information. In November 2015, acting as guardian and conservator, Williams deeded Perkins’s interest in the Charleston house to herself, allegedly severing the joint tenancy. Ten days later, Perkins died. Soon after, Williams filed an action against Jeffcoat in South Carolina seeking partition. Jeffcoat answered, asserting multiple defenses, including unclean hands. The trial court granted summary judgment for Williams, and the appellate court affirmed. The supreme court reversed and remanded. Although the court agreed that the basic facts were not in dispute, it stated that summary judgment is not appropriate when there are genuine competing inferences to be drawn from the facts. The court also noted that the lower court had failed to address the unclean hands issue. Further, a partition action is an equitable action, and the unclean hands doctrine recognizes that one seeking redress in equity must be free of wrongdoing, such as actions that are unfair, dishonest, willful, or unrighteous. The court stated that Jeffcoat may ultimately be unsuccessful in his defense, but summary judgment on the issue was improper. The court also held that Williams’s deed to herself of Perkins’s property interest severed the joint tenancy under the commonlaw rule that allows severance when any holder conveys her interest to a third party, and Alabama law permits guardians and conservators to convey property. Thus, Williams and Jeffcoat were now tenants in common, and the only issue on remand was whether unclean hands would prohibit Williams’s demand for partition. Williams v. Jeffcoat, 906 S.E.2d 588 (S.C. 2024).
DEEDS: Quitclaim deed to property encumbered by deed of trust does not convey fee simple title. In 2007, the
Federal Home Loan Mortgage Corporation (Freddie Mac) acquired ownership of a deed of trust securing repayment of a home mortgage loan in the amount of $216,000. In 2013, the homeowner’s association foreclosed for nonpayment of homeowner’s dues and, in 2015, conveyed the property to Nevada New Builds, LLC by quitclaim deed. New Builds then sold the property to Estrada by a recorded quitclaim deed. Estrada brought a quiet title action for a declaration that she received “clean title” via the quitclaim deed. The district court ruled for Freddie Mac. The Ninth Circuit affirmed, agreeing with the district court that New Builds’s title and, thus, Estrada’s title was encumbered by a valid deed of trust. The Ninth Circuit observed: “The Deed of Trust does not simply encumber the property. Legal title is conveyed to the Trustee (typically a third-party title company) under terms which require the Trustee to reconvey title when the encumbrance is paid. And until the encumbrance is paid, the Trustee is the holder of legal title.” Estrada v. Specialized Loan Servicing, LLC, 2024 U.S. App. LEXIS 26731 (9th Cir. Oct. 22, 2024).
EASEMENTS: Easement owner cannot use right of way to access land later added to dominant estate. In 1996, subdividers who owned a 71-acre parcel conveyed an 11-acre lot to the Deyshers “[t]ogether with an access easement … over a .386-acre area … (including a portion of the 8’ farm road and bridge) … for the limited purpose of … access to and from that portion of the premises lying west of the stream spanned by said bridge and that portion of the premises lying east of said stream.” Thereafter, the subdividers conveyed two neighboring lots to new owners subject to the easement granted to the Deyshers. Starting in 1999, the Deyshers and one of the neighbors made a series of boundary adjustments, resulting in three more acres (a Parcel B) being added to the Deyshers’ lot. After the plaintiffs purchased the neighboring lot in 2018 and the defendant purchased the Deyshers’ lot and Parcel B in 2019, disputes arose over the defendant’s cutting of vegetation in the easement and their replacement
of the bridge component of the farm road. The plaintiffs brought suit seeking declaratory relief that the easement could not be used to access Parcel B. The trial court ruled for the plaintiffs, finding that the intent of the parties when the easement was created was to allow the use of the farm road for the limited purpose of accessing the Deyshers’ lot as it existed at the time of the 1996 grant. The court explained that under the general rule, an appurtenant easement cannot be used to serve a non-dominant estate. The trial court declined to consider the extent of the burden on the servient estate. The supreme court affirmed, agreeing with the trial court that the proper focus of the analysis was the intent of the parties when the easement was created, as discerned from the conveyance instrument. The clear language of the deed precluded use to access the newly created lot, even though originally a part of the larger servient tenement. Given the plain language, there was no need to consider whether the inclusion of after-acquired land increased the burden placed on the easement. Ryan v. Ryan, 2024 N.H. LEXIS 233 (N.H. Oct. 25, 2024).
EJECTMENT: Foreclosure purchaser cannot obtain possession by summary judgment when there is evidence of improper sale. Martin obtained a $50,000 home equity line of credit, which was secured by a mortgage on residential property. Martin later engaged a law firm for legal representation in his divorce, signing a promissory note for $14,573 for legal fees secured by a second mortgage on the same property. After the legal relationship between Martin and the law firm ended, the home equity lender commenced foreclosure. At the foreclosure sale, Martin’s lawyer purchased the property with a bid of $34,929, that amount being $1 more than the payoff amount on the home equity loan. The lawyer then sent Martin a letter stating Martin owed him $97,500 under the original promissory note, then filed an ejectment action seeking possession of the property and a declaration of forfeiture of Martin’s right of statutory redemption. Martin asserted several defenses and counterclaims. The trial
court granted the lawyer’s motion for summary judgment but left the issue of possession unresolved. On appeal, the supreme court noted that without a final judgment, the court is unable to hear an appeal. But the court stated that the order granting summary judgment in the ejectment action was a final order even though it did not expressly indicate a right of immediate possession. In ejectment proceedings, a plaintiff’s right to immediate possession is implicit. Nonetheless, the court reversed the summary judgment because there were genuine issues of material fact regarding the validity of the foreclosure sale. Martin alleged that the lawyer’s bid was so low as to shock the conscience because it was approximately 15 percent of the fair market value of the property. Martin v. Scarborough, 2024 Ala. LEXIS 195, 2024 WL 4863866 (Ala. Nov. 22, 2024).
EMINENT DOMAIN: Condemnation award is properly distributed to condominium developer even though separate actions between developer and association remain pending in another court. Bloomsbury Estates, LLC (Developer) began developing land in 2006 with plans to construct two buildings in two phases. After the completion of Phase I and the sale of condominium units. In 2015, the Department of Transportation (DOT) initiated a takings action by which it permanently took one-third of the land slated for Phase II and temporarily took another part for an easement. The DOT action delayed the construction of Phase II until 2017. After mediation in 2017, the DOT, Developer, and the condominium homeowners’ association entered a consent judgment fixing $3,950,000 as the amount of just compensation for the entire taking. During the pendency of the takings action, Developer and the association each filed separate complaints against each other regarding various rights to the property, the main issue being whether Developer had successfully extended its development rights to complete Phase II. These actions paralleled the takings action until 2020 when the takings court granted summary judgment to Developer, decoupling the takings action from the parties’
respective suits against each other and ordering the payment of compensation to Developer to fully cover the loss of development rights with the remaining funds to be paid to the association. The association appealed. The appellate court reversed, finding issues of material fact in the parties’ separate actions bearing on the apportionment of funds; specifically, whether a 2013 amendment to the declaration of condominium validly preserved Developer’s development rights for Phase II. Upon further appeal, the supreme court reversed, noting that when the parties signed the consent judgment, neither title nor the respective interests in the property was left for resolution. Only the actual apportionment in accordance with the judgment was left to be done. The reversal allowed the separate actions to continue, meaning that if the association prevailed in its claims, it could obtain a judgment for damages against Developer. Dep’t of Transp. v. Bloomsbury Estates, LLC, 905 S.E.2d 36 (N.C. 2024).
LANDLORD-TENANT: Tenant has right to jury trial in forcible-entry-anddetainer proceeding. Mercy Housing Management Group, manager of a federally subsidized low-income housing complex, served its tenant Bermudez with a notice to quit on account of violations of her lease, including a guest staying beyond the prescribed time limits and that guest violating rules against maintaining and repairing vehicles on the premises and making threats and harassing another resident. When Bermudez did not vacate, Mercy Housing filed a forcible-entry-and-detainer (FED) action for possession. Bermudez answered and demanded a jury trial on the factual issues. The trial court denied the demand on the ground that there was no constitutional right to a jury trial in civil actions. Bermudez invoked the supreme court’s original jurisdiction, and the court determined that the issue was of sufficient public importance to warrant hearing the case. The court agreed with Bermudez. In Colorado, there is no constitutional right to a trial by jury in civil cases. Instead, such a right derives from either statute or court rule. In county court cases like the one
at issue, the governing rules are those within the Colorado Rules of Civil Procedure. Colo. R. Civ. Proc. 338 specifically declares that when the legislature has provided a statutory right to a jury trial, such as in actions for the recovery of specific real property, a jury must decide all issues of fact. The court went on to conclude that the FED action was essentially the same as the common-law action of ejectment, in which the issue of possession was tried by a jury. The court was not concerned that its ruling would cause the courts to become unduly burdened by delay, remarking that some delay is inherent in any fair-minded system of justice. Mercy Hous. Mgmt. Grp. Inc. v. Bermudez, 2024 Colo. LEXIS 991 (Colo. Oct. 21, 2024), opinion withdrawn, 559 P.3d 1163 (Mem.) (Colo. 2024).
OPTIONS: Summary judgment for optionor is improper when there is a dispute as to whether optionee gave proper notice of exercise. In 2015, Scotti sold a residential property to Mimiaga, financing the sale with Mimiaga executing a promissory note for $870,000 that required monthly payments. As part of the same transaction, Mimiaga granted Scotti an option to repurchase the property for $900,000, with the option being exercisable before July 1, 2020. Scotti claimed that on June 1, 2020, he notified Mimiaga in a handwritten letter that he was exercising the option. For reasons largely related to the COVID-19 pandemic, Mimiaga several times asked Scotti for permission to stay on the property with Mimiaga continuing to pay the purchase price. Mimiaga had made plans for a new job in California, but his projected start date kept changing, and, in a series of email exchanges, he indicated an interest in “refinancing the mortgage” to pay off Scotti. Alternatively, at another time, Mimiaga stated that he wanted Scotti to “purchase back” the property from him. In July 2021, Scotti filed a complaint seeking specific performance of the option agreement and filing a lis pendens. Mimiaga counterclaimed, seeking to discharge the lis pendens so that he could refinance to pay off Scotti. The trial court granted Mimiaga’s motion for summary judgment on the grounds that
consideration for an option must be separate and distinct from consideration for the sale. Because the parties established the purchase price for the property before considering the option, the option agreement was unsupported by separate consideration. The trial court also found that the option was not exercised, as the evidence failed to show delivery of the written letter. The supreme court reversed, first pointing out that the option agreement clearly stated that it was supported by “good and valuable consideration,” which was conclusive on the consideration issue. The court went on to hold that notice of exercise of the option was given when mailed, and Scotti’s attestation that he mailed the June 1, 2020, handwritten letter notifying Mimiaga of the exercise of his option was sufficient to establish an issue of material fact and to preclude the grant of summary judgment. Moreover, nothing in the agreements indicated that time was of the essence for the exercise of the option, and the communications from Mimiaga requesting to stay on the property after July 2020 and asking Scotti to purchase back the property from him could be viewed as evidence of an implied waiver or an agreement for extensions of time, also raising genuine issues of material fact as to what the parties intended. Scotti v. Mimiaga, 323 A.3d 900 (R.I. 2024).
PREMISES LIABILITY:
Lease agreement assigning duty to maintain common areas to tenant does not prevent negligence action by tenant’s employee against landlord. Robinson, an employee of a commercial tenant, slipped and fell on ice on the leased premises. The lease provided that the tenant was responsible for snow and ice removal on the property. Robinson sued the landlord for negligently failing to maintain its facilities in a safe condition. The trial court entered summary judgment for the landlord, concluding that under the lease, the landlord did not owe Robinson a duty of care to keep the premises safe. The supreme court reversed, stating that a premises owner owes a duty to entrants to use ordinary care to keep the premises in a reasonably safe condition, to warn entrants of
dangerous conditions, and to take reasonable precautions to protect them against foreseeable dangers arising out of the arrangements or use of the premises. Although a lessor and lessee in a lease of commercial real estate may agree on which party will maintain the leased premises and which party will be liable for injuries caused by improper failure to maintain, such exculpatory clauses are binding only on the parties to the lease but have no effect on non-signers, even if the landowner maintained no control of the premises. Robinson v. 1 Bouchard St.
WASTE: Life tenant of mineral estate is not entitled to royalties from mining. In 2006, Paul and Cheryl Woods, owners of a parcel of real property, executed a deed conveying a life estate in one-half of the mineral estate to Paul’s parents, Alva and Velma Woods. Thereafter, Paul and Cheryl conveyed the property to Deselms, reserving only a one-half mineral interest in fee. In 2010, in separate transactions, Alva and Velma and Paul and Cheryl
entered into leases with mining companies. After Alva died in 2021, the lessees obtained a title opinion stating that Velma Woods was not entitled to royalties from mineral production because she held a life estate but was entitled only to interest on the royalties during her lifetime. A few months later, Velma sold her life estate to Phoenix Capital for $700,000, which filed an action against Deselms, Paul and Cheryl Woods, and the lessees to declare its rights under the deed and to quiet title or, in the alternative, to reform the 2006 deed to allow the
Disclaimers in Estate Planning, Second Edition
By Christopher P. Cline
Disclaimers are governed by both state and federal law. This concise guide explains the Uniform Acts involved and the specific issues raised by Section 2518 in order to create the best strategies and techniques for effectively utilizing disclaimers.
A Practical Guide to Commercial Real EstateTransactions: From Contract to Closing, Third Edition
By Gregory M. Stein, Morton P. Fisher Jr, and Michael D. Goodwin
Understand how to effectively handle a commercial real estate deal. Useful for attorneys with all levels of experience, the authors explain every aspect of a real estate transaction, focusing on the drafting, negotiation, and revision needed to get the deal done. Includes forms and appendices.
life estate to collect the royalties. The trial court ruled in favor of the defendants, holding that a life tenant cannot receive royalties without an agreement with the remainderman or express language in the deed allowing for payment of royalties to the life tenant. It also held that the statute of limitations barred the claim to reform the deed. The supreme court affirmed, first explaining that in contrast to a fee simple owner, the rights of a life tenant are much more limited. In fact, the law of waste prevents a life tenant from opening up new mines or quarries or oil or gas wells or leasing the land for these purposes. All proceeds arising therefrom belong to the remainderman. The only relevant exception to the general rule was not supported by the facts; nothing in the language of the deeds purported to defeat or modify the common-law rule so as to give the life tenant the right to royalties. Moreover, absent ambiguity in the language of the deeds, extrinsic evidence is not allowed to show the parties’ intent otherwise. The cause of action for reformation was barred because it accrued on the recording of the deed more than ten years earlier. Phoenix Cap. Grp. Holdings, LLC v. Woods, 556 P.3d 1148 (Wyo. 2024).
LITERATURE
REAL ESTATE CONTRACTS:
In Cake-And-Eat-It-Too Clauses, 2024 Wis. L. Rev. 87 (2024), Prof. Tanya J. Monestier asserts that liquidated damages and election of remedies clauses are legally incompatible, although a surprising number of courts give effect to both in the same agreement, reasoning that they represent the parties’ intent and should be enforced under freedom of contract. In Prof. Monestier’s view, the two clauses cannot be reconciled, and no amount of freedom of contract logic can get around this fact. These clauses, in effect, allow the seller to have his cake (a minimum guarantee of damages) and to eat it, too (to sue for more if damages exceed the liquidated amount). The clauses often come as a surprise to purchasers and can result in substantial costs, particularly in highly volatile real estate markets, as seen during the COVID-19 pandemic. She urges courts to see that the very nature
of a liquidated damages clause forecloses the option of an accompanying election clause. This is because the essence of liquidated damages is that it is an exclusive remedy; the parties opt to pre-determine damages themselves rather than have a court do it after the fact. It is well known that not all contract clauses are enforceable merely because they appear in the contract; instead, courts routinely deem contractual provisions unenforceable for a variety of reasons: unconscionability, fraud, and public policy. Indeed, every purported liquidated damages clause must be determined to be a valid risk allocation mechanism instead of a penalty. In the absence of legislation prohibiting such clauses, it should be up to the courts carefully to scrutinize them and reject them in appropriate cases.
HOUSING: In The Evolution of Inclusion: The Mount Laurel Doctrine at Fifty, 48 Nova L. Rev. 264 (2024), Prof. Paula A. Franzese looks back and offers a critical assessment of the successes and failures of the long-celebrated Mt. Laurel doctrine established nearly 50 years ago, in Southern Burlington County NAACP v. Township of Mount Laurel, 336 A.2d 713 (N.J. 1975). The New Jersey Supreme Court, rebuking the exclusionary zoning schemes common in 20th-century suburban development, ruled that every developing municipality must provide its fair share of the regional need for low- and moderate-income housing. The plaintiffs challenged the New Jersey Township of Mount Laurel’s zoning practices as racially discriminatory. The court cast the issue as one of economic discrimination, making plain that home ownership was the principal means to upward economic mobility but because of exclusionary zoning, denied to large segments of the population. In compelling detail, Prof. Franzese shows how the court’s pronouncement was met with popular opposition and further frustrated by the ineptitude of the administrative agency charged with oversight and management of the Mount Laurel imperative. It took three more trips to the supreme court before the ruling produced meaningful results. Prof. Franzese celebrates the persistence of the court —it resisted the
entrenched system of exclusion in favor of fairness, rights, and the general welfare of all citizens of the state.
HOUSING: In his essay, Why Can’t We Build? Explanations and Reasons for the Building Crisis, 17 N.Y.U J. L. & Liberty 379 (2024), Prof. David Schleicher offers both disheartening and hopeful insight into the seemingly intractable issue of access to housing. As to the former, he suggests that although there is ample need and land to build, existing residents oppose new construction in their communities because they want to exclude others and keep market prices for their homes high. This attitude is described as localism, which tends to be parochial and selfish; politicians choose not to go against the wishes of their constituents and have the power to veto or make costly new construction. But what is hopeful are the moves by several states and cities, preempting localism and relaxing zoning rules and the permitting processes that historically have served as barriers and have increased the cost of building in places otherwise suitable for homes. Some governments are imposing housing mandates. In the end, he urges increased efforts to dismantle the structures of localism to enable new more housing for open communities.
LEGISLATION
MICHIGAN makes criminal the intentional recording of spurious or fraudulent conveyances in the public records. Such an act constitutes a felony punishable by imprisonment and a fine. 2024 Mich. P.A. 154.
DELAWARE gives terminated tenant employees the right to a lease. The landlord must offer a written rental agreement within five business days of termination of employment. The offer may be conditioned on the tenant employee financially qualifying as a tenant and meeting the landlord’s income, credit, or other financial requirements for renting dwellings. This law does not apply if the termination of employment was for cause. 84 Del. Laws 494. n
GENERATION SKIPPING TAX Use It or Lose It!
By Brittany Horn Cook and Meredith B. Walsh
The Tax Cuts and Jobs Act of 2017 (TCJA) has provided a historic opportunity for wealth transfer, with the doubling of the gift, estate, and generation-skipping transfer tax exemption to $10 million, adjusted for inflation. This doubling, coupled with record inflation in 2020 and 2021, has resulted in a generational opportunity to transfer wealth to future generations free of transfer tax. In 2024, individuals each had $13,610,000 in estate and generation-skipping transfer (GST) tax exemption to apply to transfers. Rev. Proc. 2023-34, 2023-48 I.R.B. 1287. The TCJA is set to expire on December 31, 2025, without further congressional action. The future of the exemption is uncertain, making 2025 crucial for maximizing the available estate and GST exemption.
The Transfer Tax Landscape
To take advantage of this window of opportunity, estate planners must be prepared to educate their clients on the
Brittany Horn Cook is a managing director, wealth planner, and fiduciary counsel at Tiedemann Trust Company, a subsidiary of AlTi Tiedemann Global in Wilmington, Delaware.
Meredith B. Walsh is fiduciary counsel at the Glenmede Trust Company, N.A.
advantages of leveraging the exemption, particularly the GST tax exemption, before the 2025 sunset.
First, an understanding of the transfer tax landscape is required. Gifts and bequests are subject to gift, estate, and GST taxes. Gift tax is applied to lifetime transfers made without adequate consideration. Estate tax is applied to transfers made at death. The rate for both gift and estate tax transfers is 40 percent. I.R.C. §§ 2502, 2001(c). The GST tax is tax applied to transfers made to individuals (or trusts for the benefit of individuals) more than one generation below the transferor. Id. § 2601. The rate applied to generation-skipping transfers is an additional 40 percent, on top of the gift or estate tax rate applied to the transfer. Id. § 2641(b).
The effective rate of transfers to grandchildren and more remote descendants is high. But Congress instituted both annual and lifetime exclusions from gift, estate, and GST taxes. The current exemption is historically high; for comparison, under Section 501 of the Taxpayer Relief Act of 1997 the estate, gift, and GST tax was as low as $1,000,000. Under I.R.C. §§ 2505 and 2010, the gift and estate tax exemptions are a unified credit; to the extent an individual does not use the exclusion during his or her lifetime, the balance of
the exemption can be applied to transfers made at death. Because not every transfer is a generation-skipping transfer, an individual may exhaust his or her gift and estate tax exemption before using his or her GST tax exemption. For example, an individual may make a gift to a child that uses the gift tax exemption, but that has no GST tax consequences. Therefore, the gift and estate tax exemption will be depleted, but the GST tax exemption is not affected.
The combination of congressional action and inflation adjustments has resulted in the ability to pass over $13 million completely transfer tax free. For individuals who will likely be subject to the estate tax, using the full estate and GST tax exemption is critical to get the full benefit of the exemption prior to the sunset. The IRS has made clear, through Treasury Regulation § 20.20101(c), that any taxpayer who uses the exemption for gifts will not be penalized with respect to the estate tax after the exemption amount is decreased in 2026. But the doubled exemption is essentially “use it or lose it.” After the exemption amount returns to its preTCJA levels in 2026, if the taxpayer has used less than $5 million, indexed for inflation, the taxpayer will only have an incremental exemption to the postTCJA exemption amount.
UTC TRUST VS. DYNASTY TRUST
GRANTOR TRUST
NONGRANTOR TRUST
Estate planners must be prepared for high pressure and time-constrained conversations in 2025 to fully maximize this “bonus” exemption.
The Right Tools to Prepare for Sunset
The most powerful tool at an estate planner’s disposal for leveraging this exemption is a grantor, dynasty trust for the benefit of multiple generations. Although any transfer using the exemptions is beneficial, a thoughtful structure can leverage the affect of the gift significantly over multiple generations.
The Power of a Perpetual Trust
Dynasty trusts are trusts that have no limit on their duration. For example, Tennessee Code § 66-1-202 has expanded the Rule Against Perpetuities to allow a trust to last up to 360 years.
Florida’s Stat. § 689.225 permits trusts to have a term of up to 1,000 years. Furthermore, Delaware, South Dakota, and Rhode Island are examples of states that have abolished the Rule Against Perpetuities in its entirety, thereby allowing trusts to last in perpetuity. S.D. Codified Laws § 43-5-8; R.I. Gen. Laws § 34-11-38; Del. Code Ann. 25, § 503. Even if individuals do not reside in a state that permits perpetual trusts, they may generally avail themselves of the expanded term by appointing a trustee with situs in a state that has abolished the rule against perpetuities. S.D. Codified Laws § 21-22-2; Del. Code Ann. tit. 12, § 3340.
Under the Uniform Trust Code (UTC), adopted by most states, some version of the common law rule against perpetuities has been adopted. The rule was first seen in the United States in 1886: The classic common law
language written by lawyer John Chipman Gray states, “No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.” Rule Against Perpetuities § 201.
Using the current maximized exemption will be favorable to future generations regardless of whether the trust is subject to the rule against perpetuities. The power of a dynasty trust is inarguable, however, when modeled out over multiple generations.
Depicted above is a “UTC Trust,” subject to the rule against perpetuities and a classic dynasty trust.
The UTC Trust assumes no grandchildren are living at the funding of the trust and the last life in being dies 60 years after the trust’s creation, allowing for an 81-year trust lifespan.
The chart assumes that the first (grantor) generation is using his or
her gift tax exemption ($10 million in this example) to fund the trust. Each generation is assumed to last 30 years (short time frame for simulation purposes only), with trust assets growing at a compounded rate of 7 percent. The illustration assumes no income tax was paid during the life of the grantor. After the death of the grantor, a 40 percent effective tax rate is assumed. The illustration assumes the trusts are outside of each generation’s taxable estate. It further assumes a 40 percent gift and estate tax rate applicable to future generations. The calculations assume a modest 4% annual withdrawal rate after the death of the grantor.
With a UTC Trust, at the end of the perpetuities period, $266,550,283 would be forced out into the hands of the grantor’s descendants, to be taxed upon their respective deaths. In the hands of a dynasty trust, the $266 million would continue to grow free of transfer tax, allowing additional generations to use and enjoy the funds.
From the above numbers, it is easy to see the vast difference in wealth accumulation when the assets remain free of estate and GST tax in trust for multiple generations. This chart demonstrates how funding irrevocable trusts designed to last at least three generations using the GST exemption is beneficial in all states but also that the compounding power of a dynasty trust will result in significant wealth preservation for future generations.
The Gift of Grantor Trust Status
Structuring the dynasty trust as a grantor trust will further turbocharge the applied exemption. An intentionally defective grantor trust is designed to allow all items of income and deduction to flow through to the grantor, yet still be outside of the grantor’s taxable estate for transfer tax purposes. I.R.C. § 671. Each year the grantor is living, he or she pays the income tax on the trust’s income, allowing the trust to continue to grow income-tax-free. This has a double benefit of also depleting the grantor’s taxable estate. Grantor trusts also permit incredible flexibility for the
grantor to transact with the trust without income tax consequences, allowing sales of assets or purchases of assets without any gain recognition. This can be a very powerful tax deferral and planning strategy.
Conclusion
The math behind the funding of a grantor dynasty trust is clear. The question of whether to maximize the full exemption before sunset and how much of the exemption to use is personal to each individual’s financial goals, for the rest of that individual’s lifetime and for his or her descendants. For a gift in trust to be complete and outside the grantor’s estate, the grantor cannot continue to benefit from the trust property and generally cannot have access to the funds. See id. §§ 2036, 2037, 2038. As much as the TCJA is an opportunity for powerful estate planning, it should not come at the expense of a comfortable lifestyle for the grantor. Working with a multidisciplinary team of tax and financial advisors will allow advisors to calibrate the exemption planning that will benefit future
generations while maintaining the individual’s financial security.
Helping individuals understand the outsized benefits of thoughtful planning, in situs selection, tax structure, and full use of the exemption will allow individuals to make the most of this moment and plan for generations to come.
This article is provided solely for informational purposes and is not intended to provide financial, investment, tax, legal, or other advice. It contains information and opinions that may change after the date of publication. The authors take sole responsibility for the views expressed herein, and these views do not necessarily reflect the views of the authors’ employers or any other organization, group, or individual. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Readers should consult with their own financial, tax, legal, or other advisors to seek advice on their individual circumstances. n
KEEPING CURRENT PROBATE
CASES
INTENTIONAL INTERFERENCE WITH INHERITANCE RIGHTS:
Adequate remedy in probate prevents intentional interference claim. In Vondrasek v. Heiss, No. 2024-G-0012, 2024 WL 3756546 (Ohio Ct. App. Aug. 12, 2024), the court affirmed the trial court’s dismissal of the plaintiff’s claim on the ground that it was not ripe because the plaintiff had not exhausted the remedies available in the probate proceeding relating to the will that was the alleged product of interference.
MALPRACTICE: Maryland affirms strict privity requirement for suits by beneficiaries. In Bennett v. Gentile, 321 A.3d 34 (Md. 2024), the Maryland Supreme Court reaffirmed its holding that the strict privity rule prevents disappointed beneficiaries of wills and trusts from seeking to hold the drafting attorney liable in tort for malpractice. The court notes that the harshness of the rule may be mitigated by the newly enacted reformation provisions of the Maryland version of the UTC. The court also turned away the beneficiary’s contractual claim, finding that any benefit to the plaintiff was incidental to the revision of the trust intended to disinherit another child of the settlor.
MALPRACTICE: New Mexico Rules of Professional Conduct do not create duty to non-client. In its opinion in Waterbury v. Nelson, 557 P.3d 96 (N.M. 2024), the New Mexico Supreme Court held that an attorney owes no duty to a non-client under the statutory or common law of the state. In addition, the court held
Keeping Current—Probate Editor: Prof. Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409; gwb@ ProfessorBeyer.com.
Contributors: Julia Koert, Paula Moore, Prof. William P. LaPiana, and Jake W. Villanueva.
Keeping Current—Probate offers a look at selected recent cases, tax rulings and regulations, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.
that the Rules of Professional Conduct do not establish a duty but may be used to establish a standard of care once a duty has been found.
NO-CONTEST CLAUSES:
Non-party witness not subject to forfeiture. A will beneficiary made an affidavit at the request of a non-beneficiary who moved for permission to file a late objection to probate. The motion was denied, and other beneficiaries sought to enforce the will’s no-contest clause against the affiant. In Matter of Estate of McLaughlin, 104 Mass. App. Ct. 752 (2024), the Massachusetts appellate court reversed the trial court’s grant of summary judgment for the other beneficiaries, holding that the required strict construction of the clause means that it cannot be enforced against a witness, even if the witness has not received a subpoena.
POWER OF APPOINTMENT: Power of appointment makes trust interest revocable for purposes of property division on divorce. Spouse 1 is the beneficiary of a discretionary trust which terminates on the death of Spouse 1’s parent. The parent is the donee of a power of appointment over the trust property; the taker in default is a trust for Spouse 1 and Spouse 1’s issue. In the divorce proceeding between Spouse 1 and Spouse 2, the district court held that Spouse 1 did not have a property interest in a discretionary trust and that the trust was not an “economic circumstance” because the power of
appointment makes Spouse 1’s interest revocable within the meaning of the Colorado statute governing property division on divorce, Colo. Rev. Stat. Ann. § 14-1-113(7)(b). Spouse 2 appealed, and the Court of Appeals affirmed in In re Marriage of Smith and Butterworth, No. 22CA2182, 2024 WL 4113939 (Colo. App. Aug. 22, 2024). The court held the meaning of “revocable” to be ambiguous and then consulted the legislative history and concluded that the term included the possible exercise of the power of appointment by the parent.
PRETERMITTED CHILD:
Child unknown to the testator at time of execution of will is not omitted child. Under California Probate Code § 21622, a child born before the execution of the relevant testamentary instrument is presumed to have been intentionally omitted. Under case law, the presumption can be overcome if the child can show that the only reason for the omission was the testator’s or settlor’s lack of awareness of the birth and that no provision was made solely because of that lack of awareness. In Estate of Williams, 324 Cal. Rptr. 3d 406 (Cal. Ct. App. 2024), the intermediate appellate court affirmed denial of a petition to be declared an omitted child because, although at the time the decedent’s revocable trust was executed the decedent did not know of the child’s birth, the deliberate omission of four other children who were known to the decedent and the disposition of the trust property to the only two children of the decedent’s marriage show the decedent’s intent that only the two marital children receive any part of the estate.
REFORMATION:
Reformation requires evidence of intent of all settlors. In Connary v. Shea, 320 A.3d 429 (Me. 2024), a case of first impression, the Maine Supreme Judicial Court held that under Maine’s version of UTC § 415, Me. Stat. tit. 18-B § 415, reformation is
possible only if it can be shown to be necessary to conform the trust terms to the intention of all of the settlors of the trust. In the instant case, the proffered evidence related to only one of the two spouses who created the trust.
SLAYERS: Federal common law disqualifies slayer as beneficiary of ERISA plan. A son feloniously murdered his parent, who was a participant in a benefit plan covered by ERISA. In a case of first impression, the Seventh Circuit held in Standard Insurance Company v. Guy, 115 F.4th 518 (7th Cir. 2024), that the son is disqualified as a beneficiary under federal common law and that the question of preemption of the relevant state’s slayer statute by ERISA need not be addressed.
TRUSTEE FEES: An attorney who also serves as a trustee is entitled to reasonable legal fees. A trustee who is an attorney petitioned for the payment of fees for legal work related to the trust. The trial court denied the petition holding that the self-hiring created a conflict of interest. On appeal, the Maryland intermediate appellate court reversed in Matter of Trust Under Will of Lanier, 319 A.3d 1142 (Md. Ct. App. 2024). The court held that the common law of the state does not prohibit the payment and that Estates & Trusts Code § 14.5-802, the Maryland version of UTC § 802, does not completely supplant the common law, citing the statutory provision to that effect, Estates & Trusts Code § 14.5-106 (UTC § 106). Reasonable compensation, therefore, can be paid.
UNDUE INFLUENCE: Presumption of undue influence must be rebutted by preponderance of the evidence. The Supreme Court of New Hampshire held in In re Estate of Colanton, 324 A.3d 967 (N.H. 2024), that once the objectant presents substantial evidence of undue influence, including when that evidence constitutes an inference drawn from a confidential or fiduciary relationship between the testator and the person alleged to have procured the will through undue influence, the proponent of the will needs to prove the absence of undue
influence by a preponderance of the evidence, expressly declining to require clear and convincing evidence.
WRONGFUL DEATH: Claim for loss of material services by surviving spouse does not terminate on remarriage. Overruling three intermediate appellate court decisions, the Illinois Supreme Court in Passafiume v. Jurak, No. 129761, 2024 WL 4231544 (Ill. Sept. 19, 2024), held that a surviving spouse’s claim under the Illinois wrongful death statute (760 Ill. Comp. Stat. § 180/0.01 et seq.) for loss of material services, unlike a claim for loss of consortium, does not terminate on the surviving spouse’s remarriage.
TAX CASES, RULINGS, AND REGULATIONS
ESTATE TAX: Transferred assets included in the decedent’s estate. The decedent suffered from Alzheimer’s and had given her great-nephew power of attorney before losing capacity. Shortly before she died, the great-nephew transferred approximately $17 million of her assets to a limited partnership. The greatnephew served as the manager of the partnership and signed on her behalf as a limited and general partner. The partnership assets were used to pay the estate tax. In exchange for the assets, the decedent received a .0095% general partnership interest and a 99.9941% limited partnership interest. The nephew did not keep enough cash outside of the partnership to account for normal living expenses, and all living expenses were paid from the partnership. When valuing the majority interest of the partnership included on the estate tax return, the executor included a discount of 15% for lack of control and a 25% discount for lack of marketability. The IRS audited the estate tax return, attacked the discount, and issued a notice of deficiency. The Tax Court in Estate of Fields v. Comm’r, T.C. Memo. 2024-90, observed that the requirements for including the property in the gross estate under § 2036(a) were met. First, the decedent made an inter vivos transfer of property. Second, the decedent retained an interest or right in the property until death. Third, the
transfer was not a bona fide sale for adequate and full consideration. The court surmised that any non-tax business purposes were post-hoc justifications, given that there had been no discussion of transferring her assets into any partnership until her health started declining rapidly. It noted that the decedent also had the right as both the limited partner and the general partner acting together to dissolve the partnership. The court found a 20% negligence penalty on the underpayment of tax, holding the greatnephew did not have reasonable cause to believe a significant discount was warranted.
LITERATURE
ART: In Artful Imbalance: How the US Tax Code and State Trust Laws Enable the Growth of Inequality through HighValue Art Collections, 89 Brook. L. Rev. 681 (2024), Mimi Strauss explores how the 2021 Pandora Papers revealed the United States as a global haven for those who wished to shelter enormous wealth while paying minimal taxes on highvalue art and NFTs. This “onshore” tax crisis results from money laundering, the securitization of art and NFTs, and the state-by-state trust system. These legal and illegal forms of tax-dodging exacerbate wealth inequality and strain public resources. Strauss proposes a multipronged solution to address the issue, including national trust registration and tax, elimination of Domestic Asset Protection Trusts, and re-engagement with UNESCO.
EXCULPATORY CLAUSES: In Too Cozy? The Ethical Case Against Allowing Attorney-Trustees to Shield Themselves from Personal Liability Through Blanket Exculpatory Clauses, 59 Real Prop. Tr. & Est. L. J. 67 (2024), Rebecca O’Neill examines how lawyers acting as attorney-trustees can add broad exculpatory clauses to trusts that shield them from liability for negligence or recklessness in trust administration. She argues that this protection allows attorney-trustees to operate under a lower ethical standard and advocates for reforms in the law governing attorney-trustees.
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JAMES BROWN’S ESTATE: In The Curious Case of the James Brown Estate, 92 Geo. Wash. L. Rev. 753 (2024), Lee-ford Tritt explores the world of iconic musicians such as Michael Jackson, Aretha Franklin, Prince, and James Brown. Despite their legacies, their estates encounter legal difficulties tied to copyright laws, which can interfere with their intended estate plans, a situation referred to as “estate bumping.” This article uses James Brown’s Estate as a case study to illustrate the challenges of estate bumping and provides estate planning recommendations for artists.
SEIZURE
OF INHERITED PROPERTY: In Estate to State: Pay-to-Stay Statutes and the Problematic Seizure of Inherited Property, 95 U. Colo. L. Rev 839 (2024), Brittany Deitch examines how pay-to-stay laws enable states to recover incarceration costs from current or former inmates, including through the seizure of inherited property. This article critiques pay-to-stay statutes, particularly for their use of seizing inherited property, which infringes on the rights of both the decedent and the beneficiaries. Deitch advocates for the abolition of pay-to-stay statutes, asserting that states should not have the power to intercept inheritances.
SOUTH AFRICA: In In Search of an Intent Doctrine in the Law of Wills: A South African Perspective, 33 Tul. Eur. & Civ. L. F. 38 (2024), James Faber discusses the critical idea of the testator’s intent, building upon previous American scholars’ work in this area. Faber argues for an “actbased” approach that focuses on the act of making a will as a legal action, arguing that this method effectively captures the complex nature of the testator’s intent. Using this approach, the article aims to create a stronger foundation for developing a clear doctrine of intent in the law of wills.
UNDUE INFLUENCE: In The New Undue Influence, 2 Utah L. Rev. 231 (2024), Reid Weisbord and David Horton explore how the doctrine of undue influence has long been controversial as relationships are complex, the challenges
to donative transfer are litigated after the owner dies, and the vagueness of “undue influence” often results in protecting a decedent’s family at the expense of nontraditional relationships. Recently, some jurisdictions have adapted the concept and created a “new undue influence” to combat elder abuse. This article analyzes the trend in California and finds that the new approach has led to higher success rates for litigants but also has raised issues of duplicative lawsuits between the probate and the civil litigation systems.
WILL
VS. INTESTACY: In Is a Will Better than Intestacy? 98 U. Cin. L. Rev. 631 (2024), Kristine Knaplund examines how scholars have advocated for relaxed formal requirements for wills to increase their prevalence and reduce legal disputes during probate. Knaplund provides an empirical study, focusing on David Horton’s survey of the 2007 probate files from Alameda County, California, and compares them to the probate files from 1870 St. Louis, Missouri, when formalism reigned. The article examines whether these reforms have produced the expected benefits, such as more wills being created, less litigation, fewer abandoned cases, and a quicker probate process than intestate estates.
LEGISLATION
CALIFORNIA completes a full adoption of the Revised Uniform Fiduciary Access to Digital Assets Act. 2024 Cal. Legis. Serv. ch. 799.
CALIFORNIA passes the KasemNichols-Rooney Law to require the conservator to provide notice if the conservator proposes to remove the conservatee from his or her current residence. 2024 Cal. Legis. Serv. Ch. 455.
DELAWARE adopts the Uniform Special Deposits Act. 2024 Del. Laws Ch. 465.
DELAWARE enacts the Uniform Health Care Decisions Act. 2024 Del. Laws Ch. 467. n
AN ESTATE PLANNER’S GUIDE TO BUY-SELL AGREEMENTS FOR THE CLOSELY HELD BUSINESS FOURTH EDITION
By Louis A. Mezzullo
An Estate Planner’s Guide to Buy-Sell Agreements for the Closely Held Business is a comprehensive guide to buy-sell agreements for estate planning attorneys and other professionals who advise closely held businesses and their owners. It includes a detailed discussion of the objectives of a buysell agreement, planning considerations involved in choosing the appropriate type of buy-sell agreement, drafting issues, and both tax and nontax issues.
Although much of the text applies to any type of entity, there are separate sections dealing with S corporations, partnerships and limited liability companies, and professional service corporations. Valuation issues and special concerns when dealing with family-owned entities are also discussed, and sample agreements are included.
This fourth edition reflects changes to the tax code made by the Tax Cuts and Jobs Act of 2017 and includes a detailed discussion of Connelly v. U.S., which involved the application of Internal Revenue Code (IRC) § 2703 to a buy-sell agreement between two brothers and whether life insurance proceeds payable to the company should have been added to the company’s fair market value although the company had an obligation under the buy-sell agreement to purchase the deceased insured’s shares in the company.
The Ins and Outs of Title and Survey Issues in Commercial Real Estate Transactions
By Wendy S. Gibbons and Vincent Macauda
In real estate transactions, title and survey issues are critical matters that can significantly affect land use and development. It is essential for sellers, purchasers, and lenders to support the title insurance commitment with a land survey for the transaction. In doing so, they will verify ownership, land boundaries, and any potential encumbrances, defects, or restrictions on the property that could affect marketability or interfere with the purchaser’s proposed use of the land.
Wendy S. Gibbons is senior vice president and deputy chief underwriting counsel for Old Republic National Title Insurance Company. She is co-vice chair of the Title Insurance Committee of the Commercial Real Estate Group of the RPTE section. Vincent Macauda is the national practice lead for ALTA Surveys and Zoning for CBRE’s Assessment & Consulting Services and managing director of CBRE Land Surveying. He is a member of the Commercial Real Estate Group of the RPTE section.
Title problems such as adverse ownership interests and unreleased liens can delay the closing of the transaction or derail it entirely. Survey issues such as boundary disputes, unrecorded easements, and encroachments onto the land or onto adjacent land also can delay the closing and affect the value and potential future use of the property. This article examines the types of land surveys with a focus on the ALTA/ NSPS land title survey, the title company’s requirements for removing survey exceptions in the policy in reliance on a land survey, and survey-related title endorsements that rely on a land survey to provide expanded coverage to the insured.
Purchasers or the lenders financing land purchases or refinancing typically require a survey before agreeing to provide financing. The required survey will assess the property’s boundaries, confirm access to and from the land, review the location of improvements,
and determine whether there are encroachments, easements, or other survey-related matters that could affect the value or use of the land. Purchasers and lenders want to be certain there are no survey issues that would affect the marketability of title or interfere with the use of the property. Title companies also rely on a survey to identify the following: discrepancies in boundary lines; differences between the legal description of record and as surveyed; the existence of water features affecting the property or implicating riparian rights; problems with the legal description, including deed record overlaps with an adjoiner, or failure of the legal description to close; the presence of utility markers evidencing underground lines, cemeteries, drainage ditches, railroad tracks, and party walls; and the existence of unrecorded easements and encroachments. A title policy benefits both the lender and purchaser because it protects both against
loss or damage from hhidden risks, unpaid taxes, outstanding liens, and ownership disputes. For the lender, the title insurance policy also protects the lender’s investment by ensuring that the lender is in first lien position.
Title companies also rely on surveys to delete the standard survey exception from the title commitment and policy at the insured’s request. Although the exact wording of the general or standard survey exceptions in the policy may vary by title insurance underwriter and depend on the jurisdiction in which the property to be insured is located, the following language is representative of the survey exceptions typically found in a title commitment or policy:
1. Easements or claims of easements not shown by public records.
2. Any encroachment, encumbrance, violation, variation, or adverse circumstance affecting title that would be disclosed by an accurate or complete survey of the land. In commercial transactions, title companies will rely on a survey to issue survey-related endorsements, which will be discussed later in this article. The terminology for requesting deletion of the survey exception differs throughout the country but is often “deletion of the survey exception,” “affirmative survey coverage,” “expanded or extended coverage,” or a request to “insure over survey matters.” In some states, regulations prohibit removal of the survey exception and restrict coverage to an endorsement to the policy that is filed or approved by state regulators. Attorneys should consult a local title company regarding the availability of survey coverage or deletion of the survey exception in the state where the property to be insured is located.
Types of Land Surveys
Real estate law practitioners need to be familiar with several types of land surveys. In the residential setting, the most common survey is known by several names, including location survey, mortgage survey, and title survey. Typically defined by the state law of the jurisdiction where the property is located,
Although using a location survey in commercial transactions may be acceptable to the title company and can save money, it does not provide the same assurances as a boundary survey.
these laws keep the cost of land surveys affordable for residential acquisitions. Only the title company and the lender may rely on this type of survey, not the home purchaser. These surveys typically are not boundary surveys. Despite this limitation, some title companies have accepted location surveys in commercial transactions to provide survey coverage on the title policy. Real estate practitioners must advise their clients that although using a location survey in commercial transactions may be acceptable to the title company and can save money, it does not provide the same assurances as a boundary survey. This could lead to boundary disputes and title claims. So, a safer approach is to invest in a more comprehensive boundary survey.
The next survey commonly found in a real estate legal practice is the boundary survey. Like residential surveys, the scope of a boundary survey typically is defined in state law. A boundary survey determines the location of property lines and corners of a property described in a conveyance document, such as a deed. A boundary survey does not include the improvements located on the property.
When the improvements on a parcel of land are incorporated into a boundary survey, the result is known as an as-built survey. One generally would order this survey upon completing a construction project to confirm that the planned improvements were constructed in the correct locations as
shown in the site plan and preliminary construction drawings.
In the simplest sense, incorporating the matters set forth in an American Land Title Association (ALTA) title commitment into an as-built survey turns the as-built survey into an ALTA /NSPS Land Title Survey as long as the surveyor also satisfies the minimum standard detail requirements set forth by ALTA and the National Society of Professional Surveyors (NSPS).
The ALTA/NSPS Land Survey
The ALTA/NSPS Land Title Survey (ALTA Survey) was created to satisfy the title insurance industry’s desire for uniformity in the documents needed to underwrite a commercial real estate acquisition or loan. As discussed above, title companies require a land survey to delete the survey exception, and the ALTA Survey has become the gold standard for doing so. When provided to title underwriters, they will remove the general exception and list only exceptions they find in the ALTA Survey. Examples of these exceptions include building and setback encroachments, legal description errors, height or parking violations, and many other matters that require the detail shown by an ALTA Survey.
Here are some practice pointers for the commercial real estate professional: 1. The drafters of the ALTA/NSPS Minimum Standards acknowledge that certain properties or interests in real property such as marinas, mobile home parks, easements, leases, and other non–fee simple interests may have issues beyond what are contemplated by the minimum standards and the scope of work may need to be discussed and negotiated. For example, lenders will often require that the manufactured homes be located on an ALTA Survey of the mobile home park to evidence compliance with setback requirements. The ALTA/NSPS Minimum Standards do not require that the surveyor locate manufactured homes on the survey, so negotiating this
additional scope of work should be considered.
2. The ALTA Standards require that the surveyor receive complete copies of the most recent title commitment or, if a title commitment is not available, other title evidence satisfactory to the title insurer. Some attorneys assume that the surveyor will obtain these documents as part of the survey. The surveyor will rely on the title company to provide these. Also, some surveyors will not start the survey until they receive these documents. This may extend their timeline and cause closing delays. You and the surveyor should agree on when the surveyor will begin work and what they will need to do.
3. Ask for the correct Table A Optional Items and understand their cost. Many surveyors will charge additional fees for each Table A Optional Item needed, so check with your lender to obtain its survey requirements and include the desired optional items with your original contract with the surveyor.
4. Determine the flood zone classification of the property yourself by checking FEMA flood maps. If any part of the property is in a flood zone, you or your lender may want the surveyor to issue a Flood Elevation Certificate, which identifies the base flood elevation and the elevation of the base floor of improvements. A return trip by your surveyor to obtain this information typically will cost more than had you ordered it with the original work.
5. The height limitations for improvements from the local municipality and the location and way the municipality requires the measurements be taken. Instruct the land surveyor to take the improvement measurements in this way. If you do not instruct the land surveyor, the surveyor may need to return to take those measurements and will typically
charge you an additional fee.
6. Utilities observed by the land surveyor must be shown on the ALTA Survey. This is a change from the prior ALTA Standards, which required Table A Optional Item 11(a) to be selected, which is no longer required. Table A Item 11(a) now requires that you provide the land surveyor with utility plans to supplement the survey. Table A Item 11(b) now requests that the surveyor engage a private utility location service to estimate the location of underground utilities. This can be a costly addition and not something typically needed unless construction or development is planned for the site.
7. Consider whether depicting an offsite easement rather than having the land surveyor survey it under Table A Item 18 will satisfy your needs and those of the lender. This is a less costly approach that often provides all that is needed.
Title Requirements to Delete the Survey Exception
To understand the effect of deletion of the standard survey exception in a title insurance policy, one must consider the survey coverage built into the 2021 ALTA owner’s and loan policies. Covered Risk 2(c) in the ALTA 2021 owner’s and loan policies insures against:
[a]ny defect in or lien or encumbrance on the Title … including but not limited to, insurance against loss from … the effect on the Title of an encumbrance, violation, variation, adverse circumstance, boundary line overlap, or encroachment (including an encroachment of an improvement across the boundary lines of the Land), but only if the encumbrance, violation, variation, adverse circumstance, boundary line overlap, or encroachment would have been disclosed by an accurate and complete land title survey of the Land.(Emphasis added.)
This Covered Risk is limited by the standard general exception for survey matters discussed above. If the survey exceptions are not deleted, the policy will include no coverage for loss or damage arising out of encroachments over boundary or setback lines, boundary line issues, adverse possession or prescriptive easement claims, and shared driveways or apparent easements not of record. A typical requirement for a survey in Schedule B-I of the ALTA title commitment says: “In order to delete the general survey exceptions from Schedule B-I of the policy, an accurate and complete survey meeting the Company’s requirements [may directly reference the type of survey required such as the ALTA/NSPS] must be furnished to the title company.” If the survey reveals encroachments, encumbrances, violations of setback lines, boundary line issues, or other adverse circumstances, the same will be “read” into the policy by the title company and those matters will appear as exceptions in the commitment and policy. Note that the insured must give the survey to the title company. This requirement follows established case law holding that the title insurer does not have a duty to obtain a survey to issue a title insurance policy. See Kuhlmann v. Title Ins. Co. of Minn., 177 F. Supp. 925 (W.D. Mo. 1959). It is up to the insured to obtain a survey and correspondingly negotiate with the surveyor those items that should appear on the survey to benefit the surveyor’s client, the title insurer issuing the title policy, and the lender providing financing for the transaction.
Note also that the survey must be “an accurate and complete survey meeting the Company’s requirements.” What is an “accurate and complete” survey? Courts have held that title insurers are not liable for encroachments, boundary line disputes, or other matters if an inadequate survey fails to disclose them. Section 1 of the 2021 ALTA/ NSPS survey standards states that title companies, lenders, and their respective customers and insureds may rely on surveys that are of professional quality and appropriately uniform,
complete, and correct. Section 1 defines “complete” as the on-site fieldwork, the preparation of a plat of the land title survey in relation to documents provided or obtained by the surveyor from the title company, any information from Table A items requested by the client, and the surveyor’s certification of a survey.
From a title insurer’s perspective, the most accurate and complete survey is the ALTA Survey. The ALTA Survey is the survey of choice for commercial transactions that involve higher dollar and policy amounts. The ALTA Survey provides a detailed survey in a standardized format that can be used for as-built and recently completed construction. Each title insurance underwriter establishes its own guidelines for reliance on a survey and dictates what type of survey will be considered a correct and complete survey for the transaction. For example, the title company may accept a location report for a residential transaction but require an ALTA/NSPS-certified surveyor for a commercial transaction. The accepted standard for commercial transactions is an ALTA Survey, and in residential transactions, a correct and complete survey typically is the less comprehensive mortgage survey or location report. Title companies will accept a less detailed survey on residential properties because they have determined by review of claims history that there is less risk in residential transactions on platted lots or metes and bounds parcels with low acreage.
Upon receipt, the title company will conduct a detailed review and examination of the survey. The title company will then make appropriate Schedule B exceptions in lieu of the general survey exception for such matters as unrecorded easements, overlaps, encroachments, easements located outside the recorded easement boundaries, and other possessory interests and matters disclosed by the survey. If the title company also has actual knowledge of a survey matter, appropriate exceptions for survey matters must be added to Schedule B.
Deleting the Survey Exceptions Without a Survey
There are instances where a title insurer will not require a survey in order to delete the standard survey exception based on claims history and lower risk assessment. This may be cost saving for your client. Each title insurer will have its own guidelines and requirements, so you should consult with your local title company on their requirements. There usually is a distinction between the requirements for residential and those for commercial transactions. For example, if the property is a 1–4-family residential dwelling located on a platted subdivision lot, the title insurer may not require a survey in order to delete the general survey exception for a loan policy or an owner’s policy up to a certain liability amount. The title insurer also may limit the amount of acreage of land that will be acceptable for agreeing to delete the survey exception from the policy without a survey. In the commercial space, many title insurers will agree to delete the survey exception without a survey for a loan policy up to a certain amount of policy liability such as $10–25 million. One significant exception to the waiver of the requirement of the survey is if there is new or recently completed construction. Survey coverage without a survey is also not available where state regulations require a survey in order to delete the survey exception.
Another cost-saving option for your client to consider is whether the title company will delete the survey exception based on a prior survey. The general requirement for a title company to rely on a prior survey is the execution of a no-change-since-thedate-of-the-last-survey affidavit signed by the owner or the seller in a purchase transaction stating that there have been no changes, there are no new encroachments or easements, and there has been no new construction. Each title insurer will have its own form. There is not a standardized ALTA form. The title company may limit the age of the survey that will be eligible for a no-change affidavit. Generally, a survey that is older than the timeframe to establish adverse possession in the state
where the property is located will not be acceptable, and the title company will require a new survey or an older survey to be updated and re-certified. Surveys that are older than acceptable may be considered case by case. It is up to the discretion of the title underwriter whether it will accept a no-change affidavit. If the title company is not willing to accept a no-change affidavit to provide survey coverage to the date of the current transaction, another option would be to negotiate a limited exception for survey matters after the date of the prior survey. This option also may be relevant if the no-change affidavit provided to the title company discloses improvements or construction after the date of the prior survey.
Recordation of the Land Survey
Normally, a survey on the property to be insured as part of a refinance or purchase transaction need not be recorded in public records unless state or local law requires it. Common reasons for recordation include the resolution of property line disputes under state statute and a final order issued in a quiet title or partition suit establishing new boundaries. Some states, such as South Carolina, customarily record a survey plat of the legal descriptions of the land to be conveyed. In certain rural, mountainous, or coastal areas, it may be difficult to determine boundary lines, and it is customary practice in these areas to record a survey. Recording a survey also may be required for parcel splits or subdivision of land in compliance with state statute or county ordinance.
The following is a discussion of several ALTA endorsements that are survey-related and depend on the review of a survey acceptable to the title company for issuance with the policy.
ALTA 17-06, Access and Entry Endorsement
Subject to policy exclusions, conditions, and exceptions, Covered Risk No. 4 in the ALTA owner’s and loan policies provides coverage against loss or damage, not exceeding the amount of insurance, sustained or incurred by the
insured due to “no right of access to and from the Land” as of date of the policy. The owner’s and loan policies also contain a limitation in Condition 1(g) of the owner’s policy and 1(i) of the loan policy stating that the definition of land includes no right, title interest, or easement in abutting streets, roads, avenues, alleys, lanes, ways, or waterway, but this does not modify or limit the extent that a right of access is insured by that policy. It is well-established by case law that the access coverage in the policy provides legal access only. Courts have interpreted legal access under the policy to mean the land abuts a public road. The policy does not insure (1) access to a particular public road or street; (2) the type of access; (3) the physical condition or width of access; or (4) that the public road is physically open or publicly maintained. The ALTA 17-06 provides expanded access coverage in the title policy. It insures against loss or damage if, as of date of policy, (1) the land does not abut and have actual vehicular and pedestrian access to a designated public street; (2) the public street is not physically open and publicly maintained; and (3) the insured has no right to use the existing curb cuts or entries along the portion of the street that abuts the land. The endorsement is available for an owner’s or loan policy. To issue this endorsement in a commercial transaction, the title company will rely on a review of an ALTA Survey or another survey that meets the company’s guidelines for confirmation that the insured land abuts a street designated as a public road on the survey, the road is shown as physically open on the survey, and the survey depicts curb cuts or entry points that provide actual vehicular and pedestrian access to the land without gaps or gores. The title company also will verify with the county, state, or municipality that the road is publicly maintained.
ALTA 17.1-06, Indirect Access Endorsement
The ALTA 17.1-06 endorsement provides coverage against loss or damage, at the date of policy, if the easement identified in Schedule A of the policy
does not provide the land identified in Schedule A of the policy actual vehicular and pedestrian access to a public street, the street is not physically open and maintained, or the insured has no right to use existing curb cuts or entries along the portion of the street that abuts the easement. The endorsement applies when access to the public street is by way of an easement shown as an insured estate in Schedule A of the policy. The endorsement is available for an owner’s or loan policy. To issue this endorsement, the title company will review an ALTA Survey or other survey that satisfies the company’s requirements to confirm that the survey depicts the recorded easement or easement to be recorded, the easement abuts the land and the designated public street, and the land has actual vehicular and pedestrian access to a physically open and publicly maintained street through the easement insured in Schedule A of the policy.
ALTA 17.2-06, Utility Facility Endorsement
The ALTA 17.2-06 endorsement insures against loss or damage if the insured lacks a right of access to the utilities specified in the endorsement in rightsof-way or easements benefiting the land due to (1) a gap or gore between the insured land and the right-of-way or easement; (2) a gap between the boundaries of the rights-of-way or easements, or (3) termination by the grantor or successor of the right-of-way or easement. The endorsement is set out in a “check the box” format for water, electrical , natural gas service, telephone service, electrical power service, sanitary sewer, and stormwater drainage. The endorsement also includes fillable blanks for additional services not included. Recently, there have been requests to add internet service to this list. This endorsement is available for an owner’s or loan policy. The endorsement does not insure the right to hook up to the utility or service line. It ensures only the availability to do so in the rightof-way or private easement. To issue this endorsement, the title company will review the survey to confirm whether
the identified utility and service lines are in the public right-of-way or a private easement benefiting the property. The title company is looking for more than a designation that there is a platted utility easement or a private easement in which lines could be located. The title company is looking for evidence of actual physical lines in the right-of-way or easement depicted on the survey. It is more difficult to issue this endorsement on vacant property to be developed because utility or service lines may be depicted only on plans and not actually physically located on the property. Sometimes, the title company may request additional documentation such as letters from the utility company confirming it services the property or maps showing the location of a utility line.
ALTA 19-06, Contiguity Endorsement—Multiple Parcels Endorsement
This endorsement insures that two or more parcels insured in Schedule A are contiguous along defined boundary lines and insures that there are no gaps along the common boundary line of the parcels. It may be issued with the owner’s or loan policy. The title company will examine an ALTA Survey or other survey acceptable to the company depicting all the parcels referenced therein and confirm that there are no overlaps, gaps, or gores among the parcels. Lines are identified within the endorsements by a direction such as “failure of the east property line of Parcel A to be contiguous to the west boundary line of Parcel B.” Sometimes, an insured may request language in the endorsement that the parcels are contiguous along contiguous lines, common lines, or adjacent lines. The title company may agree to use this language after reviewing the survey for contiguity of parcels, especially if the insured land is a large assemblage of parcels in a commercial development.
ALTA 19.1-06, Contiguity—Single Parcel
The ALTA 19.1-06 endorsement insures that the insured parcel is contiguous to another uninsured parcel of land along identified boundaries. It also insures
that there are no gaps or gores between the two parcels. It may be issued with an owner’s or loan policy. To issue, the company will review an ALTA Survey or other survey that satisfies company requirements and confirm that there are no gaps or gores between the boundary lines of the parcels depicted on the survey. The other parcel may or may not be insured under another title policy. If the other parcel cannot be identified by policy number, effective date, and underwriter, it will need to be identified by the recording information of the vesting deed for the uninsured parcel.
ALTA 19.2-06, Contiguity—Specified Parcels
This endorsement is another option for the insured who would like coverage against loss or damage if parcels are not contiguous. Rather than stating that identified parcels are contiguous along boundary lines, the endorsement insures that identified parcels, as shown on an identified survey, are contiguous. For example, Parcel A is contiguous to Parcel B and Parcel B is contiguous to Parcel C. The same requirements for a survey review apply as for the other endorsements in the ALTA 19 series.
ALTA 22-06, Location Endorsement
The ALTA 22 endorsement insures against loss or damage sustained by the insured due to the failure of a designated improvement to be located on the land at the street address described in the endorsement as of the date of policy. It may be issued with an owner’s or loan policy. The title company will confirm by review of the survey that the designated improvement is located within the boundaries of the land and at the address identified for the property on the survey. If the survey does not include a property address, the title company will confirm the street address from the property tax records, US post office, or other reliable means. If there is a discrepancy relating to the street address and state law permits, the endorsement can be modified, if state regulations permit, to refer to the source of the property address.
ALTA 25-06, Same as Survey Endorsement
The ALTA 25-06 endorsement insures against loss or damage if the land described in Schedule A of the policy is not the same as that identified on a designated survey. The survey relied upon to issue this endorsement must be satisfactory to the title company and depict the land to be insured by the establishment of record boundaries, controls, closure, etc. The title company will review the legal description shown on the title commitment and that shown on the survey along with the drawing on the survey to confirm that all are identical and note any discrepancies. If there are slight discrepancies between the survey legal and the legal record in the title commitment, ask the title company if it will insure both versions in Schedule A. The survey must be certified to the title company and the title underwriter unless otherwise approved by the title underwriter. If the discrepancies involve a lack of closure or calls and distances that vary, the title company will make additional curative requirements. The survey relied on is identified on the face of the endorsement by date, name of surveyor, and job number. This endorsement can be issued with an owner’s or loan policy.
ALTA 25.1-06, Same as Portion of Survey Endorsement
The ALTA 25.1-06 endorsement is a variation of the ALTA 25 endorsement, insuring that a portion of the land shown on the survey is the same as that insured by the policy. The structure of the endorsement is to insure against loss or damage sustained by the insured due to the failure of the land described in Schedule A to be the same as an identified tract or parcel depicted on the survey. The survey relied on is identified in the endorsement by date, name of surveyor, and job number. This endorsement is applicable when, for example, there is a survey of a shopping center or mixed-use development with outparcels and the current transaction involves only a portion of the land to be conveyed or financed. Relying on the survey of the entire development rather
than a new survey of the carve-out is a cost-efficient solution for a buyer or borrower. The same requirements as the ALTA 25.1 above relating to the survey are applicable. This endorsement can be issued with an owner’s or loan policy.
ALTA 28-06, Easement—Damage or Enforced Removal
This endorsement is available for an ALTA owner’s or loan policy. It insures against loss because of the forced removal of or damage to existing buildings located on the land because of the exercise of the right of use or maintenance of a specified easement excepted in Schedule B of the policy. This endorsement is beneficial when there is a concern that a specific recorded easement may affect property use or the improvements. The ALTA 28-06 is limited to building coverage only. It does not provide coverage for any parking lot, fencing, retaining walls, signs, etc. The title company will review the location of the easement on the survey vis-à-vis the buildings located on the land and assess the risk as to whether the exercise of the easement will damage the building or require forced removal of the building. If the survey depicts, for example, the easement running under an existing building or a building extends halfway or more into the easement, the title company is likely to make additional requirements to contact the easement holder to terminate or abandon the easement, obtain a consent to encroach to be recorded, or ask for a relocation of the easement. Sometimes, a letter from the utility that it has no physical line in the easement or it relocated the easement to another location will be sufficient for the title company to issue this endorsement.
The ALTA 28 endorsement also can be issued to provide coverage when blanket easements affect the property. A blanket easement lacks a specific description as to its location on the property, creating uncertainty and risk for owners and lenders. The endorsement mitigates the risks by providing coverage if a property owner is required to remove or modify the building on
the land due to the exercise of the easement rights by the easement holders. The ALTA 28 is usually requested concerning old blanket utility easements disclosed on the survey as having no identifiable location. To issue the ALTA 28 for a blanket utility easement, the title company typically will evaluate the age of the improvements located on the land, the age and purpose of the blanket easement, the use of the property, and the physical location of existing utilities on the land. To issue this endorsement, the title company may accept a containment letter from the utility in which it agrees to contain its easement rights to the area where the physical line is located. The title company may require relocation of the existing utility line subject to a blanket easement or require recording of an amendment to the easement agreement describing the specific location of the easement. It can be issued with an owner’s or loan policy.
ALTA 28.1, Encroachment— Boundaries and Easements
This endorsement provides coverage against loss or damage arising out of the encroachment of an existing building onto adjoining land or an existing building on adjoining land onto the property to be insured. It also includes coverage for encroachments of an existing building onto an easement. Like the ALTA 28-06, coverage is limited to buildings (or improvements) located on the land. The coverage in the endorsement is subject to any exception in Schedule B specifically identifying the encroachment. There is also forced removal coverage for any improvement located on the land because of the exercise of easement holders’ right of use or maintenance. Unlike the ALTA 28, there are no references to specific easements in Schedule B. The endorsement applies to any easements affecting the property that are excepted in Schedule B. It can be issued with an owner’s or loan policy. If there are designated encroachments that the title company will not cover, they will be specifically excepted explicitly in Section 4. Examples of matters that may be excluded from coverage include encroachment of
a building onto a public road or public right of way, a building located on top of an underground easement, encroachment of a building over more than half the width of the easement, or encroachment of an adjoiner’s improvements onto the land for the time of adverse possession or a prescriptive easement under state law. The title company will review an ALTA Survey or another appropriate survey for the type of property to see if the survey depicts any building encroachments over property lines or easements.
ALTA 28.2-06, Encroachment— Boundaries and Easements—Described Improvements
The ALTA 28.2 provides the same coverage as the ALTA 28.1, but coverage can be customized to apply to designated improvements other than a building located on the land. The improvements to be covered can be customized and itemized in Section 2 of the endorsement. If the project you are working on has a unique improvement of concern, such as a bridge, fountain, playground, pickleball court, parking garage or carport, or asphalt parking lot, this endorsement can be tailored to fit the type of improvement that is an issue. This tailoring is common in a
multifamily apartment transaction that includes other unique improvements besides the apartment buildings. The requirements to issue are the same as the other ALTA 28 forms in the series. It can be issued with an owner’s or loan policy.
ALTA 28.3-06, Encroachments—
Boundaries and Easements—Described Improvements and Land Under Development
This endorsement provides coverage for existing and future improvements. This is the endorsement to request when the property is to be developed or under construction. It can be issued with an owner’s or loan policy. Substantive coverage is the same as the ALTA 28.1 regarding existing improvements, but expands coverage to future improvements to be constructed according to the plans and specifications for the project prepared by the architect or engineer. The definition of improvements covered in the ALTA 28.3 is expanded beyond “building” to include a structure and any paved area, including any road, walkway, parking area, driveway, or curb located on land or adjoiner that constitutes real property by law. The endorsement will reference the plans, name of engineer, date, and job number. The requirements for survey review are the same as for ALTA 28.1 for existing improvements. For future improvement coverage, the title company will want to review the plans and specifications for the project depicting future improvements to be constructed with a survey overlay for review.
Conclusion
Understanding and addressing title and survey issues quickly will provide a smooth path to closing and result in the issuance of a loan or owner’s title policy with coverage beneficial to the insured. Working closely with the title company and surveyor is an essential part of due diligence in real estate transactions to effectively resolve title defects and survey issues to satisfy the needs and goals of counsels’ lender and purchaser clients. n
Bribing a Survivor to Protect Your Cadaver— Part 2
By William A. Drennan
[Y]ou’ve got a lot of children of baby boomers starting to make decisions about funerals who are questioning the death practices of previous generations, and who don’t see the value of an $8,500 . . . funeral that doesn’t hold meaning for them
Lauren Oster, Could Water Cremation Become the New American Way of Death?, Smithsonian Mag. (July 27, 2022), https://tinyurl.com/3trhu2yp (emphasis added).
Does Your Client Dread Being Dumped Down the Sewer at Death?
Part 1 detailed why a client might have nightmares. Until a few years ago, the United States essentially was a binary death care country. Regardless of the circumstances, you likely would have been buried or cremated by a licensed funeral director in a respectful manner. See Hilary Young, The Right to Posthumous Bodily Integrity and Implications of Whose Right It Is, 14 Marq. Elder’s Advisor 197, 252 (2013) (“Almost everyone is either buried or cremated after death.”). Whatever ill will survivors harbored against a decedent, it seemed unlikely they would take it out on the corpse.
William A. Drennan is a professor at Southern Illinois University School of Law and a former editor for the Books & Media Committee of the Real Property, Trust and Estate Law Section of the ABA.
Now, without some protective planning, a disgruntled, mischievous, or environmentally zealous surviving spouse or next of kin might have the decedent boiled in lye and poured down the sewer (legal in 28 states), composted (legal in 10 states), or left outside to rot for weeks or months, with the insects, at a scientific research “death farm.” Part 1 also briefly discussed a possible security device—adding a financial incentive clause (a/k/a “bribe”) in a last will or trust to encourage a designated survivor to carry out the decedent’s cadaver disposal wishes.
Goals of This Article
This Part 2 discusses the need for a testamentary financial incentive in these situations, the legality of incentive clauses generally, and practical planning and drafting considerations. This Part 2 also considers whether a financial incentive clause would be void for being contrary to public policy. In addressing this legal topic, this Part 2 examines the broader philosophical, practical, and societal questions of whether the living or the dead should decide the fate of cadavers.
The Need for a Financial Incentive Clause for Cadaver Disposition
As mentioned in Part 1, although state laws differ, just including a client’s cadaver disposition instructions in the last will may not be sufficient to save your client’s cadaver from the sewer or
the compost heap. Leading legal authorities and commentators refer to the testator’s cadaver instructions as a mere “hope,” Ray Madoff, Immortality and the Law 18 (2010), or “merely a request with probative effect.” B.C. Ricketts, Annotation, Validity and Effect of Testamentary Direction as to Disposition of Testator’s Body, 7 A.L.R.3d 748–49, § 1(b) (1966). As a matter of common law, the testator’s lack of control traces back at least to the landmark 1882 English opinion in Williams. v. Williams, [1882] 20 Ch. 659 (Eng.), in which the court basically proclaimed that nobody owns a body. In Williams, the decedent directed that he should be cremated; instead, his family promptly buried him. In an action to have him exhumed and cremated, the court declared that the decedent’s directions had no legal authority because
there can be no property in a dead body, and therefore it is impossible that by will or any other instrument a body can be disposed of.
Id. at 661. A corollary to this principle is that the surviving spouse (or the next of kin if there is no surviving spouse) has a quasi-property right in the decedent’s cadaver. This right allows the spouse or next of kin to exercise discretion in choosing any lawful method of disposition. Id.; see also Alix Rogers, Unearthing the Origins of Quasi-Property Status, 72 Hastings L.J. 291 (2020) (tracing the roots of this doctrine in the
State laws provide no protection when the people who were willing to carry out the testator’s direction are missing or are unwilling or unable to protect the cadaver.
laws of the US states); but see Francis Foster, Individualized Justice in Disputes over Dead Bodies, 61 Vand. L. Rev. 1351, 1390 (2008) (arguing that the majority of US courts rejected this approach).
The view that the decedent’s directions in a last will are merely a “hope” is supported by statutes providing that if the decedent fails to designate an agent to dispose of the cadaver, the surviving spouse (or the next of kin if there is no surviving spouse) has the right to choose the method of disposition. See, e.g., In re Estate of Whelan, 827 N.W.2d 184, 187 (Iowa 2013). Furthermore, even if a state law regime provided that the decedent’s instructions would be binding, they woul dbe ineffective if there were no surviving person to fight for the decedent’s wishes. Madoff, supra, at 18 (“[State laws] provide no protection when [the] people who were willing to carry out the testator’s direction are missing” or are unwilling or unable to protect the cadaver); Daniel Sperling , Posthumous Interests: Legal and Ethical Perspectives 145 (2010) (“Bodily testaments are not compelling unless voluntarily enforced by survivors.”).
Even if an executor or a court official tried to uphold the will and fight for the decedent’s clearly expressed wishes, their prospects for success against a surviving spouse or next of kin might be bleak. See, e.g., Holland v. Metalious, 198 A.2d 654, 655 (N.H. 1964) (rejecting the instructions of the decedent, who wrote the best-selling novels Peyton Place and Valley of the Dolls). If the decedent has already been buried against their wishes, there is a strong common law preference for not exhuming a body. See, e.g., Smart v. Moyer, 577 P.2d 108, 110–11 (Utah
1978) (relying on the ancient principle that a “person, once buried, shall not be exhumed except for the most compelling of reasons”). Also, if the corpse has been cremated against the decedent’s wishes, a court order to bury the entire body would be futile (although the cremains could be buried or treated respectfully).
Practical Planning and Drafting Considerations for Financial Incentive Clauses to Protect a Cadaver
As the decedent’s cadaver-disposition directions stated in a last will generally are a mere “hope,” the testator seeking nightmare relief needs to engage in more detailed planning.
Choosing the Sepulcher Agent and Successors. A 2019 survey found that 46 states have procedures allowing a testator to appoint an agent with authority to decide cadaver disposition. Tanya D. Marsh, You Can’t Always Get What You Want; Inconsistent State Statutes Frustrate Decedent Control over Funeral Planning, 55 Real Prop. Tr. & Est. J. 147, 163 (2020). Perhaps the agent could be called a “sepulcher agent.” A preliminary step would be choosing and effectively designating a sepulcher agent under the procedure permitted by applicable state law.
In structuring the arrangement, the client should provide the financial incentive to the same person with legal authority to dispose of the cadaver under state law (normally, the sepulcher agent). Otherwise, the person with the financial incentive may be forced to argue that the decedent’s directions in the last will have primacy under state law, which may be a losing argument. For example, in Estate of Whalen,
the Iowa Supreme Court rejected the deceased wife’s clear instructions to bury her in Montana, and instead allowed the surviving husband to pick the state of burial. 827 N.W.2d 184, 187–88 (Iowa 2013).
Under the applicable state law, it may be possible to designate one or more successors. See, e.g., 755 Ill. Rev. Stat. (ILCS) § 65/10. This may be advantageous because the decedent’s first choice may predecease, become mentally disabled, or be unwilling to act when the time comes.
Document Choices. An important planning point is choosing the documents to (1) designate the sepulcher agent, (2) specify the decedent’s preferences for cadaver disposition (and related wishes concerning embalming, a celebration of life or a wake, a funeral or other memorial services, and related matters), and (3) provide for the financial incentive payments to the designated agent. The applicable state statute may provide a list of possible documents for designating the agent. See, e.g., id. § 65/40(a) (listing a last will, a prepaid funeral or burial contract, a health care power of attorney, or a signed and notarized document following a statutory form). Whatever document is chosen for specifying the decedent’s wishes, it needs to be available promptly after death. An applicable state statute may provide that these terms of a last will can be effective immediately even if the will has not been admitted to probate yet. See, e.g., id. § 65/40(b).
Presumably the primary document controlling the disposition of the decedent’s wealth will be the document providing for the payment of the financial incentive to a successful sepulcher agent. If payment will not be delayed for multiple years, presumably the financial incentive clause could be a contingent bequest under the testator’s last will. This could be appropriate if the testator is confident that the remains (or cremains) will not be disturbed in the future. Bequests under a last will are likely to be paid when the probate estate closes in a year or two after death (unless the executor is willing to make an early distribution). For example, if the decedent specified burial at a particular
cemetery plot, the testator may be comfortable with an outright payment of the financial incentive to the sepulcher agent when the probate estate closes and final distributions are made. This confidence may be based, in part, on the “well-recognized principle . . . that the disinterment of a body once laid to rest is not favored.”
Frank D. Wagner, Annotation, Enforcement of Preferences Expressed by Decedent as to Disposition of His Body After Death, 54 A.L.R.3d 1037–67, § 5(b) (1973).
On the other hand, if the testator is concerned the sepulcher agent may exhume or otherwise disturb the corpse (or cremains) in the future, then the testator might prefer to pay the incentive from a revocable trust. The financial incentive arrangement could become a separate trust upon death that would authorize the trustee to make periodic payments (based on a schedule) to the sepulcher agent as long as the decedent’s wishes were followed. Using a trust would allow the probate estate to close within a reasonable time, while the
incentive trust continues for the sepulcher agent’s life.
Amount. The amount of the incentive needs to be sufficient to affect behavior, such as with a no-contest clause in a will or trust. See Roger W. Andersen & Ira Mark Bloom, Fundamentals of Trusts & Estates 166 (6th ed. 2022). The amount of the financial incentive might be based, in part, on the expected difficulty in carrying out the decedent’s wishes. If a client simply wishes fire cremation, use of a decorative urn, and burial of the urn in a designated mausoleum or cemetery plot, then the amount may not need to be as substantial. A related factor could be the degree of opposition expected from the surviving spouse (or next of kin). To create a financial incentive, the document would provide for a gift-over of the incentive amount to another beneficiary, perhaps a charity, if the sepulcher agent fails to carry out the testator’s directions.
Prepayment. Another step could be prepaying a funeral home, crematorium,
or other appropriate provider for the desired disposition. This would be strong evidence of the decedent’s intent. If the sepulcher agent also is the residuary beneficiary under the last will or trust, it could provide a further economic incentive for the agent because the cost of any other disposition presumably would reduce the residuary bequest. One commentator has written an entire law review article on prepaying disposal costs and persuasively argues that the testator’s prepaid arrangements should automatically be given top priority in deciding what should be done with the cadaver. See Victoria J. Heneman, Prepaid Death, 59 Harv. J. on Legis. 329, 376–77 (2022).
Description of Disposal Wishes, Proof to Obtain Bribe, and More
The client will want to clearly describe their wishes. This should avoid challenges that the directions are too vague or ambiguous to follow. A simple direction to “bury me in the XYZ Cemetery”
A court may declare a last will or trust provision unenforceable under the public policy doctrine if it violates a constitution, statute, or common law rule, or if the court determines it is injurious to the public welfare.
may lead to disputes about the need to embalm, the type (and cost) of a casket, the use of a burial vault, celebration of life or wake arrangements, conducting a religious or other memorial service, and related matters. The testator may want to indicate some things that are essential and must be satisfied for the sepulcher agent to receive the bonus, and some things that are merely preferred if circumstances permit.
In addition, the financial incentive clause should specify what needs to occur for the agent to receive the bonus. In particular, there could be specific instructions for the executor (or the trustee of the trust) to make the payments upon receipt of certain documents, such as receipts from a funeral home, crematorium, or cemetery. The drafter may need to anticipate contingencies. For example, if the testator wants their body donated to the XYZ School of Medicine, presumably there should be a contingency plan if the XYZ School will not accept the cadaver, perhaps because the decedent died from a particular infectious disease. The last will or trust likely should provide for payment or reimbursement of any reasonable legal fees and other expenses the agent may incur in attempting to carry out the decedent’s wishes.
Turning to the Legal Issue: The Use of Financial Incentive Clauses Generally
In a last will or trust, a client may use a financial incentive clause to exercise a level of dead hand control over beneficiaries. Viewed negatively, “[o]ne can
imagine a large hand rising—in horror movie style—out of a grave and pointing the direction survivors should take or hold them back from where they want to go.” Andersen & Bloom, supra, at 311.
A drafter may design an incentive to encourage a beneficiary to obtain a college or advanced degree, or remain free from illegal drugs, or obtain and work a full-time job, or achieve or maintain any other measurable goal or status. See, generally, Lauren J. Wolven, Incentive Trusts and Planning Across Generations, ALIABA CLE Course Materials, June 17–21, 2019. Many reported cases involve the enforceability of incentives to influence religious or marital decisions. Martin D. Begleiter, Taming the “Unruly Horse” of Public Policy in Wills and Trusts, 26 Quinnipiac Prob. L.J. 125, 126 (2012); see also Jeffrey G. Sherman, Posthumous Meddling: An Instrumentalist Theory of Testamentary Restraints on Conjugal and Religious Choices, 1999 Ill. L. Rev. 1273.
The Enforceability of Incentive Clauses—The Law of Testamentary Bribes
A preliminary step in evaluating a testamentary incentive clause can be determining whether the clause is an outright gift at death or, instead, exerts a “continuing influence” on the beneficiary’s behavior beyond the time of death. Sherman, supra, at 1277. When making outright gifts, US testators enjoy great testamentary freedom. Aside from protective provisions for a surviving spouse or a minor or disabled child, testators may dispose of their property as they wish. A court cannot “question the
wisdom, fairness, or reasonableness of the donor’s decisions about how to allocate . . . property.” Restatement (Third) of Property, Wills and Other Donative Transfers § 10.1, cmt. (Am. Law Inst. 2003). Generally, a court may invalidate a bequest or outright trust distribution at death only if it is capricious, excessively vague, ambiguous, impossible to carry out, or against public policy. Wolven, supra, at V.B.2 & 3.
A bequest is not capricious if it “satisfies a natural desire which normal people have.” Restatement (Third) of Trusts § 124, cmt. g (Am. Law Inst. 2003) (adding that a bequest may be valid even if “no living person benefits from its performance”). If a testator desires a traditional burial or fire cremation, presumably that would not be capricious, as these are the methods used by 95 percent of decedents. See Nat’l Funeral Dir. Ass’n, 2022 NFDA Cremation & Burial Report 7 (July 2022) (reporting that 59.3 percent are cremated and 35.7 percent are buried). Also, these methods generally should not be impossible to carry out because they are so common. In addition, such an instruction would not be ambiguous or excessively vague if described in adequate detail in the decedent’s last will. The question whether these financial incentive clauses will be void as contrary to public policy is the subject for the balance of this article.
The Public Policy Doctrine and Financial Incentive
A court may declare a last will or trust provision unenforceable under the public policy doctrine if it violates a constitution, statute, or common law rule, Begleiter, supra, at 141–42, or if the court determines it is injurious to the public welfare. See Andersen & Bloom, supra, at 368 n.25. For example, an incentive such as “I devise Blackacre to A, if A has killed B before my death, but if A has not killed B . . . then I devise Blackacre to C,” would be void as against public policy. Sherman, supra, at 1279.
Examples of when an incentive exerting a continuing influence after the testator’s death violates public policy could be clauses encouraging the beneficiary to divorce a spouse or designed
to prevent the client from ever marrying. See, e.g., Hall v. Eaton, 631 N.E.2d 805, 808 (Ill. App. Ct. 1994) (upholding clause encouraging divorce only because testator was trying to protect daughter from the spending habits of her husband by leaving property in trust until they divorced or until the husband died); Liberman v. Liberman, 18 N.E.2d 658, 662 (N.Y. 1939) (invalidating a clause that interfered with the fundamental right to marry). The public policy doctrine has been called the “unruly horse” of the law because the results of a particular case can be so difficult to predict. See Begleiter, supra, at 125.
Will a Cadaver-Disposition Incentive Clause Be Void for Violating Public Policy?
If the type of incentive clause proposed in this article would be valid, it could shift the balance of power from the surviving family (spouse or next of kin) to the testator. Not only family members, but also funeral homes, crematoriums, and cemeteries will have an interest in this debate. These commercial entities want certainty in knowing who has authority post-death to make cadaver disposition choices. Marsh, supra, at 161. As a result, an aggrieved party may challenge this type of clause, perhaps under the doctrine of public policy. At the heart of the question is who should decide the fate of a human cadaver.
The Needs for Speed and Certainty
Any legal approach should address the needs for speed and certainty. In the United States, cremation, burial, or other disposition tends to occur within one week of death—maybe two weeks if there are key out-of-town relatives or other special circumstances. How Long Can You Delay a Funeral?, Beyond the Dash (May 12, 2021), https://tinyurl. com/5mxxkchx. The schedule is very different when distributing the decedent’s property under the decedent’s last will. It may take weeks, or perhaps a month or more, simply to file the application and for the court to issue letters testamentary to the executor, who then has authority to begin dealing with the
decedent’s property. See, e.g., Hon. Albert J. Emanuelli, The Surrogate’s Corner, 25 Westchester B.J. 29 (1998) (regarding a month-and-a-half delay).
The timing difference suggests a difficulty if the terms of the decedent’s will are important, but on further contemplation, switching decision makers to the decedent actually facilitates speed and certainty. If the decedent clearly designated a sepulcher agent in writing according to the applicable state law, that agent could notify all interested parties promptly after the testator’s death. The testator might even provide the funeral home or crematorium with the written designation when prepaying for the services. See, e.g., 755 Ill. Rev. Stat. § 65/40(a) (allowing a decedent to designate an agent directly in a “prepaid funeral or burial contract”).
Societal and Philosophical Considerations
The ancient Greeks and Romans embraced the practice of following a decedent’s cadaver disposal wishes. Foster, supra, at 1390; Marsh, supra, at 157. In 1936, a leading scholar wrote: “[A]ll civilized nations, ancient and modern [have shared] the sentiment so universal . . . (i) that the dead shall repose [free from] profanation; (ii) [promoting] . . . morality and decency; and (iii) of proper respect for and observation of the wishes of the departed.” Percival Jackson, The Law of Cadavers 170 (1936) (emphasis added). As a society, what we do with human cadavers says a lot about us. Our traditional concern for human cadavers has been described as a “mark of human civilization” and a “defining human trait.” Keith Eggener, Building on Burial Ground, Places J. (Dec. 2010), https://tinyurl. com/46f32vuf; Ann M. Murphy, Please Don’t Bury Me in That Cold, Cold Ground: The Need for Uniform Laws on the Disposition of Human Remains, 15 Elder L.J. 381, 400 (2007). Giraffes, dolphins, elephants, gorillas, whales, and other animals reportedly grieve and engage in “death rituals,” see Jason G. Goldman, Death Rituals in the Animal Kingdom, BBC (Sept. 18, 2022), https://bbc.in/2XRILsm, but burying and cremating apparently are uniquely human practices.
Erudite philosophers have pondered this subject. One has written an entire book about the postmortem interests of the dead, including cadaver disposition concerns. Sperling, supra. In promoting organ transplants from the dead, some philosophers maintain that the dead have no interests or rights and that showing concern for your cadaver is “selfish and superstitious.” See e.g., John Harris, Wonder Woman or Superman: The Ethics of Human Biotechnology 102 (1992); see also Sperling, supra (citing philosopher Walter Glannon).
Other philosophers maintain that a testator’s interests (and rights) can continue at least as long as the person is remembered as a unique individual. Sperling, supra, at 85–86. Consistent with this view, some states recognize a cause of action if a living person “blackens the memory of the dead.” Id at 301 (listing Colorado, Georgia, Idaho, Nevada, and Oklahoma). In addition, during their lifetimes, many people are greatly concerned about their legacy, including their post-death reputations. Sebastian Ocklenburg, 5 Reasons We Want to Be Remembered, Psych. Today (Dec. 20, 2022), https://tinyurl.com/ywksx4vx.
Conclusion
Clients may care more about their cadavers than their property. Sperling , supra, at 45 (“[I]t seems unambiguous that a person’s body is one of the most precious things about which she cares, certainly more than her real property.”). Shakespeare wrote, “Who steals my purse steals trash.” William Shakespeare, Othello, act 3, scene 1.
Nobel peace prize winner Bishop Desmond Tutu’s choice of aquamation for his own cadaver in 2021 brought substantial publicity to the environmental benefits of the method. See, e.g., Karen Garcia, Become a Diamond or Get Launched into Space—7 Alternatives to Burial or Cremation, L.A. Times (May 19, 2023), https://tinyurl.com/ypc4awjz. Nevertheless, does your client want to risk being remembered as the guy who was dumped down the sewer by his kids? If not, a financial incentive clause may be helpful. n
A Primer on Real Estate Capital Raising and Certain Tax-Advantaged Structures: REITs, DSTs, and QOFs
By Cameron Weil and Michael P. Lobie
There are many ways to structure a real estate investment, but the most attractive real estate investments are the ones that are structured in a way that provides potential investors with the opportunity to qualify for one or more tax benefits. Over the years, the federal tax code (the Code) and the regulations promulgated by the US Department of Treasury (the Treasury Regulations) have become voluminous and more complicated. In the last decade, in particular, they have also been a topic of political debate and oscillation. For the most part, the tax benefits that are most important and appealing to real estate investors have remained intact (and, in some cases, have been expanded). Moreover, real estate investment sponsors and
Michael P. Lobie is a partner at Seyfarth Shaw LLP in New York, New York. He is chair of the RPTE Federal Taxation of Real Estate Committee.
Cameron Weil is a shareholder in the Real Estate & Financial Services department at Polsinelli. He is based in the New York and Miami offices and currently serves as chair of the RPTE Real Estate Private Equity Committee.
their advisors have become creative and sophisticated in structuring their investment vehicles to qualify for tax benefits. This article provides a primer on real estate capital raising and some of the important investment structures that sponsors have adopted to offer investors a tax-advantaged real estate investment: real estate investment trusts (REITs), Delaware statutory trusts (DSTs), and qualified opportunity funds (QOFs). These three vehicles can be complementary, and many real estate sponsors offer all three vehicles to their investors.
Real Estate Capital Raising
Sponsors can raise capital for a real estate investment by incurring debt, issuing equity, or a combination of the two. Debt financing can consist of a standard loan from a lender, which can be secured or unsecured, or can involve a debt instrument issued to an investor, such as a convertible note. If the debt financing is secured, it is typically secured by a mortgage on the real property itself (mortgage loan), a pledge of equity interests in an entity in the chain of ownership (mezzanine loan), or a combination of the two. Equity
financing generally involves raising capital by selling ownership interests to third-party investors in entities that directly or indirectly own real estate. The investors that typically buy such ownership interests can be either: (i) institutional investors, such as hedge funds, mutual funds, private equity funds, endowment funds, pension funds, and insurance companies, or (ii) retail investors, such as individuals.
When a real estate sponsor offers an ownership interest in a real estate vehicle, the offering may be an offering of “securities,” which requires consideration of several federal and state statutes, including the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). An offering of securities can be conducted publicly or privately. The Securities Act requires that any offer or sale of securities be registered under the Securities Act with the US Securities and Exchange Commission or qualify for an exemption from registration. The Exchange Act requires the issuer of a publicly traded security to file periodic disclosure reports, such as a Form 10-K Annual Report, a Form 10-Q Quarterly Report, and a Form 8-K Current Report,
If the REIT meets the various requirements in the Code, then the Code treats the REIT as a passthrough entity and, accordingly, avoids double taxation.
providing information concerning the issuer’s business activities.
Because of less onerous requirements on the issuer of securities, a significant amount of real estate capital raising is conducted through private offerings. Section 4(a)(2) of the Securities Act allows for a registration exemption for transactions by an issuer not involving any public offering. Most private real estate offering sponsors rely on either Rule 506(b) or Rule 506(c) of Regulation D, which are considered “safe harbors” under Code section 4(a) (2). Historically, sponsors generally have relied on Rule 506(b). That rule permits the sponsor to sell to an unlimited number of accredited investors (i.e., investors meeting certain financial or professional criteria) and up to 35 nonaccredited investors, but it does not permit the sponsor to conduct a general solicitation (i.e., broad solicitation and general advertising). Recently, however, more sponsors have shifted to relying on Rule 506(c) because it permits general solicitation. Even so, a Rule 506(c) offering can be made only to accredited investors, and the sponsor has a greater due diligence burden because it must take “reasonable steps” to confirm that each purchaser is an accredited investor.
REITs
Simply put, a REIT is merely a type of entity that is formed to either (i) own, lease, and eventually sell real property; or (ii) issue debt that is secured by real property and receive interest from
the borrower. There are many reasons why investors like to invest in REITs, but those most commonly cited are that REITs (1) allow for the “democratization of real estate”; and (2) offer tax advantages over certain other real estate investment vehicles.
Most investors cannot afford to purchase a real estate investment or do not have the time to manage the investments properly. Moreover, foreign investors generally do not have access to US real estate for various tax reasons. REITs help solve those issues by permitting investors to pay a modest amount to acquire shares in a REIT that owns institutional-quality assets and handles all of the property management responsibilities. Moreover, a properly structured REIT (or set of REITs) can be used as vehicles for foreign investment in US real estate.
REITs are one of the types of entities that are often referred to as “creatures of the Code” because they owe their existence (and certainly their popularity) to the Code. A REIT resembles a corporation in its governance and operating structure, but, if the REIT meets the various requirements in the Code, then the Code treats the REIT as a passthrough entity and, accordingly, avoids double taxation. “Double taxation” is a term that refers to two levels of taxation on the same revenue stream. For example, if a corporation is a landlord and receives rent from its tenant, then the corporation would pay taxes on the rent. If the corporation then distributes the rental income to its shareholders,
then the shareholders are taxed on that dividend. By contrast, if a landlord is a REIT (or a partnership) that meets all of the requirements of the Code, then the REIT itself would not pay taxes on the rental income, and the rental income “flows through” the REIT to the shareholders, who would then subsequently pay taxes on the income.
The most common REIT structure is an Umbrella Partnership Real Estate Trust (UPREIT). An UPREIT structure is one in which the REIT is the general partner of a limited partnership (often referred to as an “operating partnership”) that owns all or substantially all of the REIT’s assets. The limited partners of the operating partnership typically are owners of large real estate portfolios or investors in a DST that want to either dispose of the portfolio in a tax-efficient manner or pool their portfolio with other portfolios to create a larger, more diverse investment. The limited partners can contribute their portfolios of real estate to the operating partnership in exchange for interests in the operating partnership (often referred to as operating partnership, or OP, units) on a tax-deferred basis under Code section 721. These limited partners will generally negotiate tax protection provisions or agreements that limit the operating partnership’s ability to engage in certain transactions that would cause the limited partners to recognize the gain that they deferred when they contributed their portfolios. Moreover, after a certain amount of time, the limited partners generally have the right to convert their units to potentially more liquid REIT shares. Although the conversion transaction may be taxable, limited partners typically convert only when they otherwise already plan to liquidate their investments in a taxable transaction.
All benefits (including tax benefits) come with a cost and, in the case of REITs, the cost is regular and ongoing compliance and due diligence efforts. As noted above, a REIT must meet several tests and requirements. At the outset, there are various “organizational” requirements that a REIT must meet, but the most important
and time-consuming requirements are the asset, income, and distribution requirements. The paragraphs that follow summarize only some of these requirements.
The Asset Test. A REIT must ensure that at least 75 percent of its assets, by value, are “real estate assets,” cash and cash items, and government securities (75 Percent Asset Test). “Real estate assets” include interests in real property, interests in mortgages on real property, shares in other REITs, and debt instruments issued by publicly offered REITs. The 75 Percent Asset Test is measured and tested quarterly. Because the 75 Percent Asset Test permits both equity investments and debt investments in real estate, there generally are two types of REITs: equity REITs and mortgage REITs. REITs must also adhere to other asset tests, including limits on the types of securities that they can own.
The Income Tests. A REIT also must ensure that 75 percent of its gross income is derived from rents from real property, interest on obligations secured by mortgages on real property, gains from the disposition of the real property, dividends from other REIT
income, income and gains from foreclosure property, and certain other specified real estate sources (75 Percent Income Test). Moreover, a REIT also must ensure that 90 percent of its gross income is derived from one of the types of income that qualify under the 75 Percent Income Test, plus certain types of income from passive investments including stocks and securities, dividends, and treasuries (90 Percent Income Test). An important limitation on a REIT’s gross income is that a REIT’s gross income cannot include any “impermissible tenant service income.”
This restriction limits a REIT’s ability to provide to its tenants certain services, often new and innovative services. REITs often still can provide these services to their tenants, but they must either hire an independent contractor to perform the services or assign employees to work for a taxable REIT subsidiary (TRS) of the REIT in order to perform the services. Both solutions come with a cost: If the REIT hires an independent contractor, then it must pay a third party to perform services, and if the REIT has employees of a TRS perform the services, then the income
from the services is subject to corporate taxation. Both the 75 Percent Income Test and the 90 Percent Income Test are measured and tested on an annual basis.
The Distribution Test. REITs also must distribute at least 90 percent of their taxable income to their shareholders (90 Percent Distribution Test). As a practical matter, most REITs distribute 100 percent of their taxable income to shareholders because they receive a dividends-paid deduction equal to the amount of their distributions.
DSTs
A DST is a different type of real estate investment vehicle that focuses on a different tax benefit: deferral of gain under Code section 1031. Under Code section 1031, provided certain requirements are met, a real estate investor can sell real estate and defer recognition of its gain if it reinvests the sales proceeds in other real property (Section 1031 Exchange). Among other things, both the real property that the investor sells (its relinquished property) and the real property that it acquires (its replacement property) must be used in a trade
or business or held for investment, the relinquished property must be of a like kind to the replacement property, and the investor must “identify” and acquire the replacement property within a certain time limit following the sale of the relinquished property. Section 1031 Exchanges are a very popular tax-planning tool for real estate investors, and a DST structure is one way for a real estate sponsor to access that capital (i.e , the sales proceeds that a real estate investor has from the sale of its relinquished property). In short, a DST is an entity that can qualify as replacement property if certain requirements and limitations are met and respected.
By contrast to REITs, the DST structure is relatively new. The DST structure owes its genesis to Revenue Ruling 2004-86. 2004-2 C.B. 191. Broadly speaking, Revenue Ruling 2004-86 held that, for federal income tax purposes, the DST described in the ruling was disregarded and investors in the DST were treated as directly holding the real estate assets of the DST because the DST qualified as a “fixed investment trust” under Treasury Regulation § 301.77014(c) and a “grantor trust” under Code sections 671 through 679. The IRS
reasoned that the DST qualified as these two types of trusts because it was subject to certain restrictions under its trust agreement, prevented its trustees from taking certain actions that are now referred to as the “seven deadly sins.”
The seven deadly sins are as follows: (1) a DST cannot receive new capital after its initial offering has closed; (2) a DST cannot renegotiate or enter into new mortgage debt unless a tenant has become bankrupt or insolvent; (3) a DST cannot renegotiate its property leases or enter into any new leases unless a tenant has become bankrupt or insolvent; (4) a DST cannot develop or redevelop property and generally is limited to performing only normal maintenance and minor nonstructural improvements, unless it is required to do more by law; (5) a DST cannot reinvest, and must instead distribute to its investors, the proceeds from its sale of property; (6) a DST must distribute all cash, other than normal reserves, on a current basis; and (7) a DST must hold any reserves it maintains in short-term debt obligations.
DST sponsors have navigated the seven deadly sins restrictions by focusing on certain types of real estate
investments. For instance, sponsors generally (i) acquire new or recently rehabilitated properties that are stabilized or approaching stabilization (i.e., no development projects or properties that require material modifications), (ii) avoid properties with loans or leases that will need to be renegotiated during the term of the offering, (iii) target properties that are subject to a triple-net lease with a creditworthy tenant, (iv) ensure that the term of the debt that is secured by the property is shorter than the term of the property lease(s), and (v) establish reserves up front (out of loan or offering proceeds) or out of cash flow in case of future cash shortages.
There are other structural items that can be adopted to comply with Revenue Ruling 2004-86. First, because a DST cannot enter into new leases, when a sponsor wants to acquire a property that requires continuous leasing activity (such as a multifamily asset), the sponsor enters into a triple net master lease with an affiliated master tenant that engages in the leasing activity. Second, sponsors include a “springing LLC” provision in the DST’s trust agreement because sometimes, despite the best planning, situations arise in which the
DST has no option except to engage in one of the deadly sins. The springing LLC provision allows the DST’s trustees to determine that the DST must engage in one of the seven deadly sins to preserve the asset and cause the DST to be converted into a limited liability company (LLC) and for the investors’ DST interests to be converted into LLC interests. Although a spring to a springing LLC means that the investors hold an asset that no longer qualifies as relinquished property in a Section 1031 Exchange (the LLC interests), investors are better off with an asset that can be salvaged than with no asset (e.g., one foreclosed upon by a lender).
QOFs
Finally, the newest of these three taxadvantaged real estate investments is the QOF. QOFs were added to the Code by the Tax Cuts and Jobs Act of 2017. Congress wanted to spur economic investment in impoverished areas and low-income communities by providing tax incentives to real estate developers and investors. As a result, it added a new Code section charging the governors of the US states with designating certain census tracts within their states as a “qualified opportunity zone” (QOZ). Also, Congress provided rules under which a taxpayer can defer recognition of certain eligible gains, including capital gains, by investing an amount of cash equal to the gain in a QOF within 180 days of the date that the taxpayer realized the gain (e.g., the closing date of a real property sale).
A QOF is an investment vehicle classified as a corporation or a partnership for federal income tax purposes and organized for the purpose of investing in QOZs. A QOF must meet a handful of organizational requirements to qualify as a QOF, but a QOF must ensure that at least 90 percent of its assets are invested in “qualified opportunity zone property,” which includes “qualified opportunity zone partnership interests,” “qualified opportunity zone stock,” and “qualified opportunity zone business property.” Each of these types of qualified opportunity zone property is subject to certain organizational and
QOF structures are particularly well suited for classic ground-up development deals, particularly where the developer does not seek QOZ benefits and can enter the deal as a partner at the QOZB level.
operational requirements and tests. Generally speaking, the most common and flexible way to structure a QOF investment is to have a QOF create a second-tier partnership that acquires, develops, and operates the asset (QOZB, because the entity, in order for its interests to qualify as qualified opportunity zone partnership interests, must meet the qualified opprtunity zone business requirements). QOF structures are particularly well suited for classic ground-up development deals, particularly where the developer does not seek QOZ benefits and can enter the deal as a partner at the QOZB level. As discussed below, these deals provide significant tax benefits for QOF investors and are generally no less attractive for developers than other development deals.
Initially, there were three tax benefits associated with investments in QOFs: (1) The investor in a QOF enjoys temporary (currently until December 31, 2026) deferral of the gain that gives rise to its investment in a QOF; (2) if the investor holds its QOF interest for (a) at least five years before December 31, 2026, then the investor’s basis in its QOF interest is increased by 10 percent of the amount invested in the QOF, and (b) at least seven years before December 31, 2026, then the investor’s basis in its QOF interest is increased by another 5 percent (for a total of 15 percent) of the amount of gain it invested in the QOF; and (3) if the investor holds its QOF interest for at least 10 years, then the investor’s basis in its QOF interest is
increased to the fair market value of the QOF interest on the date of sale. At this point, the temporary deferral described in item (1) above is not as material as it was in 2017 and new investors in QOFs can no longer qualify for the stepup in basis described in item (2) above because an investor after 2021 will not have held its QOF interest for five or seven years before December 31, 2026. The most significant QOZ benefit is (and always has been) the one described in item (3) above because it provides for a permanent elimination of tax on the appreciation in value of the QOF interest if the QOF interest is held for at least 10 years.
Conclusion
Higher interest rates in recent years have led to decreased real estate investment activity, and sponsors have had difficulty modeling the types of returns that real estate investors find attractive; however, tax incentives can bridge the gap and provide alternative reasons to invest in real estate. As noted above, there are many ways to structure a real estate investment, but the most attractive structures provide investors with the opportunity to qualify for tax benefits. In this article, we have discussed three important real estate investment structures: REITs, DSTs, and QOFs. Structuring these tax-advantaged real estate investments can be complicated, but sponsors who work with advisors who are well-versed in the rules will find these structures achievable and attractive. n
Check out our library of new real property, and trust and estate law books!
Buy-Sell Agreements: Valuation Handbook for Attorneys
Buy-Sell Agreements: Valuation Handbook for Attorneys contains new and important information that will help attorneys draft or revise buy-sell agreements for closely-held and family business clients. This book contains the most comprehensive treatment of valuation and valuation processes in buy-sell agreements available today.
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Insurance Law for Common Interest Communities: Condominiums, Cooperatives, and Homeowners Associations
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FRANCINE L. SEMAYA, DOUGLAS SCOTT MACGREGOR, AND KELLY A. PRICHETT
This book offers comprehensive coverage of insurance-related topics involving common interest communities. It discusses and analyzes statutes, court decisions and policies on those topics and more. It is not only a useful reference tool for attorneys who represent common interest communities but is also a valuable resource for community association managers, insurance producers, and common interest community boards.
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Title Insurance: A Comprehensive Overview of the Law and Coverage
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Third-Party and Self-Created Trusts: A Modern Look
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ENVIRONMENTAL LAW UPDATE
Federal Environmental Deregulation—Authority and Limits
By the time you read this prognostication of President Trump’s promised federal environmental deregulation, work will be well underway to implement his agenda. It is reasonable to assume that his efforts will be more successful than in his first term because of his party’s control of the House and Senate and a Supreme Court often sympathetic to conservative positions. The pace and extent of environmental regulatory change will be influenced by many factors, some of which are discussed below.
The Congressional Review Act (CRA), 5 U.S.C. §§801 to 808, provides an immediate and powerful tool for a new administration to overturn regulations enacted in the last few months of the prior administration. The CRA requires agencies to report the issuance of rules to Congress and provides Congress with special procedures, in the form of a joint resolution of disapproval, to consider legislation to overturn rules. The CRA’s broad definition of “rules” may include agency directives that do not require notice and comment – e.g., guidance documents and policy memoranda. 5 U.S.C. §§555, 804(3). This opportunity allows Congress and the President to quickly remove regulations issued in the last months of the outgoing administration without requiring the lengthy rulemaking process (discussed below) otherwise required to do so.
Environmental regulations subject to the CRA include rules promulgated by
Environmental Law Update Editor: Nancy J. Rich, Katten Muchin Rosenman LLP, 525 W. Monroe Street, Chicago, IL 606613693, nancy.rich@katten.com.
Environmental Law Update provides information on current topics of interest in the environmental law area. The editors of Probate & Property welcome suggestions and contributions from readers.
Trump administration’s first term. That action would set the stage for litigation on the merits of EPA’s authority to issue such waivers. Seventeen Republicanled states have raised such a challenge, which, at least for now, the Court has declined to hear.
Authority Retained by State and Local Governments
the Environmental Protection Agency (EPA). Environmental regulations subject to being overturned under the CRA include EPA’s Lead and Copper Improvements Rule, which requires lead pipes used to transport drinking water to homes to be replaced within ten years, and EPA’s recent ban on the use of certain high-priority chemicals, such as certain chlorinated solvents.
The new administration may also decide to reverse EPA’s position in defending current legal challenges to EPA regulations. For example, EPA is currently defending challenges to a preemption waiver issued under the Clean Air Act to allow California to impose its Advanced Clean Car program, requiring manufacturers to produce an increasing percentage of zero-emission vehicles. The Supreme Court recently agreed to decide whether fuel producers have a legal right to sue over EPA’s grant of this waiver. Ohio v. EPA, 98 F.4th 288 (D.C. Cir. 2024), cert. granted sub nom. Diamond Alternative Energy, LLC v. EPA, 2024 WL 5100664 (U.S. Dec. 13, 2024). The new administration could withdraw the EPA waiver, however, as occurred in 2019 during the
State and local governments, particularly in jurisdictions controlled by Democrats, will continue to exercise regulatory authority on matters not preempted by federal law. Notable examples are state laws limiting perand poly-fluoroalkyl substances (PFAS) in public water supplies and California’s Proposition 65 law establishing “safe harbor” levels for exposure to chemicals in consumer products. Cal. Health & Safety Code §§ 25249.5 to 25249.14. More mundane examples are state environmental property transfer laws, such as the New Jersey Industrial Site Recovery Act, and the voluntary environmental remediation programs that exist in nearly every state.
Regulatory Notice and Comment Requirements
If the new administration decides to repeal any EPA regulations, it will be required to follow the same notice and comment rulemaking requirements that apply to promulgating regulations under the Administrative Procedure Act (APA), 5 U.S.C. §§ 551 to 559. This will require EPA to publish a Notice of Proposed Rulemaking in the Federal Register to provide the public with an opportunity to comment before finalizing the repeal. Depending on the regulation at issue, affected parties who
object to the repeal can file comments, which EPA will be required to address in its response. EPA must publish its response, including the final rule, in the Federal Register. If EPA’s response does not satisfy the commenting parties, those parties may sue EPA to obtain a stay and subsequent reversal of the repeal. Given the new administration’s indication that it will use executive orders to implement various changes, it is likely that affected parties will challenge executive orders as being barred by the rulemaking requirements of the APA.
Federal Citizen Suit Litigation
To the extent the new administration may choose not to enforce any existing environmental regulations rather than actively seek to repeal them, private parties may seek relief via citizen suits. Federal environmental laws containing citizen suit provisions include the Clean Air Act, 42 U.S.C. § 7604, the Clean Water Act, 33 U.S.C.§ 1365, the Resource Conservation and Recovery Act, 42 U.S.C. § 6972, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9659, the Oil Pollution Act, 33 U.S.C. § 1365, the Endangered Species Act, 16 U.S.C. § 1540(g), and the Toxic Substance Control Act (TSCA), 15 U.S.C. § 2619. These provisions allow citizen suits against private parties for violating the statute and against the EPA Administrator for failing to perform nondiscretionary duties. Although citizen-suit plaintiffs are not eligible to receive any penalties imposed by the courts to redress noncompliance, the citizen-suit provisions provide for an award of reasonable costs and attorney’s fees to prevailing plaintiffs. After the November election, environmental public interest groups such as Earthjustice began to solicit donations on social media to fund their anticipated lawsuits against the new administration.
Upcoming TSCA Reporting Requirements for PFAS Substances
Current TSCA regulations require any person that manufactures or imports, or has manufactured or imported,
PFAS or PFAS-containing articles in any year since January 1, 2011, electronically to report information regarding the articles, including production volumes and hazards, by January 11, 2026. 40 C.F.R. §§ 705.1 to 705.35. The regulations do not exempt small businesses. Small manufacturers reporting only as PFAS article importers have an extended deadline of July 11, 2026. Thus, many companies that have never dealt with TSCA, EPA, or other environmental agencies run the risk of noncompliance if they are unaware of these requirements.
The reporting rule under section 8(a)(7) of TSCA, 15 U.S.C. §2607(a)(7), requires all manufacturers (including importers) of PFAS and PFAS-containing articles in any year since 2011 to report information related to chemical identity, uses, volumes made and processed, byproducts, environmental and health effects, worker exposure, and disposal to EPA. “PFAS-containing articles” include all manufactured goods and finished products treated with certain PFAS to strengthen the packaging or product or repel water or stains.
If the new administration does not act to extend the reporting deadlines further, regulated entities will risk being named in citizen suits even if EPA does not take action to enforce the regulation. Unlike other reporting requirements under environmental law, the proliferation of personal injury lawsuits pertaining to PFAS exposure creates a new legal risk for those subject to PFAS reporting i.e., tort liability for PFAS exposures.
Companies that comply with the TSCA disclosure requirements by the applicable deadline will create a public record of their manufacture or importation of PFAS or PFAS-containing products. We expect plaintiffs’ personal injury attorneys to anticipate the new PFAS reporting eagerly. The personal injury lawyers will likely begin to review and evaluate the disclosed information to identify potential targets of lawsuits alleging harm to their clients from PFAScontaining products. But companies that fail to disclose by the deadline will be subject to enforcement from EPA and via
citizen suits filed by others, including personal injury lawyers.
Industry Standards and the Global Market
California’s Proposition 65 provides a long-term example of how businesses adjust their products to conform to the requirements of the most stringent jurisdictions in which they do business. In the age of Internet commerce, even a small local company located thousands of miles from California is likely to receive and fulfill orders from customers based in California. Sellers of products sold directly to customers will consider the cost and efficiency of producing two lines of products or simply making one line that complies with California’s requirements. For example, chillers and similar products containing refrigerants sold in California are subject to more stringent standards for ozone-depleting chemicals than in other states.
Products sold in foreign markets must also continue to comply with the standards of the jurisdictions in which they are sold. Some of those standards are more stringent than those imposed under US environmental laws. n
TECHNOLOGY PROPERTY
The Present and Future of AI for Real Estate
Years ago, a lawyer friend boasted that he had landed a cushy gig, abstracting loan documents and leases. He was paid per transaction: the more leases he reviewed, the more money he made. He would read all the documentation and then fill out a detailed questionnaire. At the time, it was common to outsource this work to the Philippines, but my friend’s clients found that the error rate of such services was so high that it was worth paying a trained American lawyer to do the work.
Today, this work is mainly done by artificial intelligence (AI) engines, trained to search for specific terms and extract key data from these leasing documents. Today, my lawyer friend’s role would be to train the AI to respond to the questionnaire accurately. This is accomplished by reviewing the outputs of the AI engine against the source lease or loan transaction and making corrections. Much as a senior attorney would train an associate or paralegal, this correction process would guide the AI engine as to what answers the attorney is looking for.
This continuous review and correction (training) distinguishes AI from typical software programming. Once an error is identified, the trainer supplies the correction, and the AI program rewrites the underlying rules. One could view the AI program as an apprentice. In time, the apprentice will become a master tradesman, but until then, the master tradesperson must monitor and oversee the apprentice. There is no
Technology—Property Editor: Seth Rowland (www.linkedin.com/in/ sethrowland) has been building document workflow automation solutions since 1996 and is an associate member of 3545 Consulting® (3545consulting.com).
Technology—Property provides information on current technology and microcomputer software of interest in the real property area. The editors of Probate & Property welcome information and suggestions from readers.
software code to review in an AI program. As the trainer, you must educate the AI through trial, error, and correction. Any AI-based application requires a continuous quality control process to monitor the results periodically and make adjustments.
As a real estate attorney, your job involves more than just abstracting lease and loan documentation. You are called upon to draft and review various documents. You need to gather information about the parties to the transaction, including name, place of incorporation, domicile, and authorized signatories. Suppose there is an existing lease being modified or a loan being consolidated into a new loan. In that case, you want to use data from these transactional documents to prepare the new transaction. This scenario is where an AI application and a document assembly engine can be used to increase drafting efficiency and accuracy.
In this article, I will discuss preparing a workflow using artificial intelligence and automated drafting. This approach is platform and software-agnostic. AI platforms are in the early stages of development, but they all share common elements. They are prompt driven. You need to ask a question. They are input driven. You must provide specific inputs, e.g., a set of documents for the system to evaluate or a constraint
limiting the system to evaluate a limited set of information. The AI also requires instructions on the output. What form do you want the output to be? You can request answers that are short and factual or long and elaborate. The output can be free-form text, an extract, or a list of comma-separated values (CSV). Finally, you can provide instructions as to the level of accuracy, sometimes called temperature. At a temperature of zero, the answers are exact and factual. As you proceed up the scale, the answers become more creative; the engine infers an answer based on a range of facts.
There is a whole cottage industry of products that leverage AI. In evaluating these products, you should find out what engine is behind the product you are licensing. ChatGPT and Microsoft’s Copilot use the engine built by OpenAI. Google’s engine, called Gemini, was built into the Google search engine. Other engines include Claudi AI, Perplexity AI, Meta’s LlaMA, and xAI’s Grok and Dojo. Unless you have an in-house developer, purchase an application-builder tool to help you design your workflow.
Getting Started
Start with the job requirements. Define what you want your application, or app, to do. For the purposes of this article, we want our app to generate a commercial lease. As the landlord’s attorney, we will be drafting the initial document. Typically, the broker or real estate agent fields inquiries for a property and sends the marketing officer a request for a lease. The request may be followed up with a proposed term sheet, which the marketing officer may generate. The agent may also provide additional documentation about the
tenant and information about guarantors. The information is reviewed for accuracy, and a lease is generated. Our goal is to speed up the process and involve the lawyers only when required to address a novel issue in the lease negotiations.
Break your requirements into phases, and then work backward. The final product is the lease, so let’s start there. Start by taking your form lease and a handful of fully executed leases and feed them as inputs into your AI engine. Start with the executed leases if you don’t have a form lease. These are your inputs. Ask the AI engine to produce a model lease with named placeholders for key terms and a series of alternative provisions for topics like warranty, condition of the premises, tenant promotion funds, signage, etc. In your instructions, make clear that the first document input, your form lease, should be considered the standard and that the other document inputs of executed leases are the variations. This will inform the AI engine that the variations are either placeholders for variables or alternative provisions. At some point in the near future, you may be able to produce a template with markup code for the document assembly engine of your choice, be it XpressDox, HotDocs, Knackly, or PatternBuilder.
Build an Inventory of Questions and Rules
Make an inventory of all the named placeholders. Use a spreadsheet to track these placeholders. You will assign each placeholder a name and a prompt. These will be the variables used by the document assembly engine. Similarly, you will want a question and a rule for each set of alternative provisions. The question could be: “In what state is the property located?” The rules could be: “property located in New York” or “property located in Connecticut.”
As you would in building a document assembly template, you will want to organize the variables and questions based on subject matter. These groupings will become pages or tabs in your document assembly engine. If you were creating a document assembly
application, you would focus on making the question or prompt clear enough for the average user to understand. You would assume the user was an attorney or paralegal with subject matter expertise in real estate law. Your questions would be simple and short.
But we are going a step further. We are not working with a person but with an AI tied to a large language model. We will ask the AI to review documents and extract the answers to each question you need to complete the lease. That means we must understand what documents or sources will contain the information required for the app. We need to understand how to phrase the question so that the AI knows where to find that information in the source documents and how to format the result to use with the template.
Let’s take a step backward. Each question we need answered is a separate process when working with AI. Think of AI as a puzzle. You must define the magic words to instruct the AI to retrieve your desired information. Before you dive in, think like a lawyer training a junior associate or paralegal. For each question, determine what documents the apprentice should review. Is it the request for lease? Or will the answer be found in the term sheet? Will any of these documents have details like corporate form, state of incorporation, notice address, mailing address, or principal officers needed for the document automation system? For each question, identify where the answers will likely be found.
Once you have identified where the answers will be found, you must discover where the answer will lie in those documents and how to frame a prompt to elicit the answer you seek. This will be a process of trial and error. Use a document like the request for lease as the input and ask, for example: “Specify the name of the tenant.” If the AI gets the correct answer from the source document, repeat the process with a different source document. If you don’t get the correct answer, adjust your question until you do. Once you get a prompt that works 95% of the time, record the prompt on your spreadsheet.
You may find that the term sheet is an excellent source of answers to many of your questions. But what happens if you don’t have a term sheet? Identify other types of documents you might have access to. Repeat the process outlined above. You may find an AI prompt that works on the term sheet won’t work on the request for lease. So, you should have a specific prompt for each source document type.
Repeat this process for each question or variable on your spreadsheet. While you “train” the AI, you also learn what prompts to give the engine to get the information you want. Sometimes, the solution is to alter the prompt. Other times, you can train the AI by telling it that it got the answer wrong and giving it the correct answer. Repeat this process enough times, and the AI may learn to start giving you the “correct” response. In this fashion, AI is different from typical rule-driven software. The goal is to obtain a consistent response to your prompt that you can rely on. Changing the prompts and training the AI is the best way to accomplish this result.
Building the AI Ingestor
As you proceed through this process, you will discover which documents contain the answers to particular questions. Consider reorganizing your questions based on the source document. If you have a request for lease document, for example, group all those questions that can be sourced from the request for lease. Create a mini questionnaire where you ask all those questions and validate that you are getting the correct answer for all your questions. At this point, you should refine your prompts and continue training the AI. Confirm the engine’s accuracy by uploading several more versions of the request for lease until you are confident the questions are working.
When you are satisfied that you are extracting as much accurate information as possible from the first document, move on to the next document. Questions that work on one document may not work on the next
document. In one document, the prospective tenant may be identified as “tenant,” whereas in another document, it may be the “requestor.” Understand how parties are identified for each document and adjust your prompts accordingly.
When building your AI ingestor app, consider how the user will be providing the document to the AI engine. If the input document is in your document management system (DMS), you may need to put in the document ID or provide a search to find the document. If the document is not in the DMS, you should allow the user to upload the document. Some information is available only in emails or from a web search. To accommodate that, you will want to allow the user to copy and paste the source information into a text box for the application to analyze. Some AI engines can only review small chunks of information. The user will need to have
a tool that breaks the source document into digestible chunks.
Putting the App Together
At this point, you can build the document assembly app, including the build-out of the interview. Replace the placeholders in the template with variables tied to the questions in your interview. Frame the alternative provisions with rules tied to the questions in your interview. Run the document assembly application to ensure it produces the desired result.
Now, bring in the AI ingestor. With some platforms, the AI ingestor will write to a database or a CSV file. If this is the case, you will want to connect the document assembly app to that database or use a CSV file as its answer source. In other cases, the AI ingestor is integrated with the document assembly app. In both cases, you will want to run the AI ingestor and review the data
that appears in the document assembly interview. If certain information is missing, you return to the AI Ingestor and refine your questions or, possibly, find new document sources to use. If the extracted information is wrong, you may need further training in your AI engine. The question should be clarified, or the engine may need more examples before it understands what information you are seeking.
Once you have a working flow, you will want to run benchmark tests. How fast does the whole process run? It may be that the AI ingestion process takes too long to run on demand. If so, you may need to come up with a batch process where a lower-cost resource uploads all the required documents. You might have a process where documents are identified by transaction and type and then run through an automated extraction process. The document drafter is then notified when the analysis is complete. At that time, the drafter can review the interviews, make any required corrections, and then produce the documents.
ambar.org/rptebooks
Hype Versus Reality
Though there is great potential for AI engines, don’t assume that you can subscribe to a platform and that it will work perfectly out of the box. AI engines should be treated like new hires. Like new associates or paralegals, the AI engine needs to prove its utility, and it will require training and oversight. Be judicious as to where in your practice you deploy the AI engine. Weigh the engine against the platform costs, plus the refinement, training, and oversight costs. As with any expense, weigh the return on investment (ROI). There are benefits from faster turnaround on document drafting, fewer emails back and forth with the client, fewer drafting errors, and more flexibility in your documents. Also, review your billing structure. Fixed fee billing or transaction-based pricing will allow you to quantify your ROI (profits before and after the app) and guarantee a faster return on your investment. AI, used properly, has a bright future in the legal industry. n
LAND USE UPDATE
Planned Unit Development
Your client came to you with a question. He is a housing developer with a 30-acre property on which he plans to build multi-family housing. He has a development plan that includes project density, building type and location, a circulation system, architectural design, and other project details. The property is zoned single-family, and your client asked the city how the zoning could be changed. The city told him that it must first rezone his property to a planned unit development zoning district, and then he must ask the city to approve the project and its development plan. Your client asked for an explanation of what the city requires. What should you tell him?
Planned unit development is the dominant method of development in many communities. It can be anything from a small-scale project to a masterplanned community. Glenwood Park in Atlanta, Georgia, is a successful, moderately sized 28-acre retail, office, and residential mixed-use development. Development Principles, Glenwood Park, https://tinyurl.com/glpark. Lakewood Ranch outside Sarasota, Florida, is a mixed-use master-planned community built on 31,000 acres, including housing, retail shopping, offices, and entertainment opportunities. https:// tinyurl.com/laflcom.
The Planned Unit Development Concept
Planned unit development became a significant development method in the 1950s and 1960s because standard
Land
Use Update Editor:
Daniel R. Mandelker, Stamper Professor of Law Emeritus, Washington University School of Law, St. Louis, Missouri.
zoning and subdivision ordinances have severe design flaws. Conventional zoning establishes zoning districts with land uses and densities available by right. Residential and nonresidential development cannot be mixed because only one use is usually allowed in each zoning district. Mixed-use development is not possible.
Zoning districts also contain setbacks, site coverage, site development, and similar requirements that must be uniform in each district. Subdivision control deals principally with infrastructure and lot and block layout in new subdivisions. Providing usable open space is an inherent problem because most open space is devoted to private yards around residential dwellings.
Development built to satisfy these requirements often has a dull and uniform appearance, which has earned it the nickname “cookie-cutter” development. Planned unit development is an alternative that provides integrated, unified, and customized design.
Statutory Authority
Statutory authority can be a problem because the Standard State Zoning Enabling Act (SZEA) adopted by most states does not authorize planned unit development, but the courts have found implied authority. Campion v. Board of Aldermen of City of New Haven, 899 A.2d 542 (Conn. 2006), for example, held that a special state zoning act modeled on the SZEA provided the necessary authority for an ordinance that authorized planned unit developments as floating zones.
The Connecticut court held that statutory authority to zone should not be
judged by the rigid standards of conventional zoning, which authorizes only zoning districts. Rutland Environmental Protection Ass’n v. Kane County, 334 N.E.2d 215 (Ill. App. Ct. 1975), held that the bargaining and negotiation in the planned unit development review process is not invalid as contract zoning.
Several states provide statutory authority that may simply authorize zoning for planned unit development. Other states, like Nevada, provide detailed standards, such as requiring a planned unit development ordinance to include “standards governing the density or intensity of land use.” Nev. Rev. Stat. § 278A.110. These standards can vary based on factors such as “The amount, location and proposed use of common open space” and “The location, design and type of dwelling units.” Id. The planned unit development ordinance must also have “standards and criteria by which the design, bulk, and location of buildings is evaluated.” Id. § 278A.220(1).
Zoning Alternatives for Planned Unit Development
A municipality can select from several zoning alternatives for planned unit development. The floating zone approved by the Campion case is one alternative. A municipality first adopts a planned unit development zone in the text of its zoning ordinance. The zone “floats” in the text until a developer applies to have his property mapped for the zone. The municipality can then replace the existing zone with the floating planned unit development zone. The floating zone alternative allows a municipality to decide where planned
unit developments will be located and specify the type of planned unit development it will approve.
Cluster zoning is residential planned unit development based on a plan approved by the planning commission. Cluster zoning does not increase residential density but clusters the residential housing allowed in part of the development on smaller lots. The area not occupied by housing is reserved as a shared open space. Cluster zoning provides an opportunity to provide good design, reduce infrastructure costs because less land is required for roads and other public services, and protect open space and other natural resources.
An overlay zone has zoning for planned unit development that overlays the existing zone, which continues to apply. An overlay zone provides some certainty to the public about the planned unit development because it applies only to the extent that it supplements the existing zone. To avoid ambiguity in the zoning that applies to the planned unit development, an overlay zone must indicate how it supplements the existing zone.
A planned unit development district can have development standards that allow planned unit development by right if it complies with the standards. By-right zoning creates certainty for developers and avoids the delay and potential opposition in a discretionary review and approval process. By-right zoning is especially effective when the built environment provides a basis for development standards. Infill development in downtown areas is an example. Tucson, Arizona, began its Downtown Infill Incentive District in 2006. See Ariz. Rev. Stat. § 9-499.10 (authorizing infill districts).
Planned Unit Development Through a Discretionary Review and Approval Process
A zoning ordinance can provide for planned unit development by including a discretionary review and approval process that involves the legislative body and the planning commission. The process begins with the legislative body’s adoption of a concept plan.
This plan, sometimes called a “bubble” or “sketch” plan, requires legislative approval and generally specifies the densities and the allowed development type.
The planning commission approves a preliminary development plan after the legislative body approves the concept plan. The ordinance specifies what the development plan should include and provides standards for the commission to apply when it approves the preliminary development plan. If the final development plan complies with the preliminary development plan, the commission will approve it.
In some communities, the legislative body approves the development plan when it adopts the planned unit development district or later, either with or without a previously approved concept plan. Some communities prefer this option because it allows the legislative body, not the planning commission, to make the essential policy decisions that determine the character of a planned unit development.
Planned Unit Development Standards
The ordinance provides standards for the planned unit development that will guide the planning commission when it reviews a development plan for approval. Standards can be nondiscretionary or authorize the planning commission to exercise its discretion. Discretionary standards must be clear and objective. Otherwise, the developer must negotiate with the planning commission for approval because the standards provide an ambiguous guide for decision-making. The following standards are typically included in planned unit development ordinances.
Size. The ordinance should include a minimum size requirement if a municipality wants planned unit development to be available only on sites with a minimum acreage.
Site Development, Dimensional, and Bulk Standards. These standards specify the building envelope for planned unit development, such as setback and height standards. They can be included in the planned unit development ordinance, or the ordinance can provide
criteria that the planning commission will apply when it decides what standards should be included in the development plan.
Design. The planned unit development ordinance can specify the required design for planned unit developments. Design standards need to be clear and objective. For example, the ordinance may require “a development with a unified site design that has housing of different types and densities and compatible nonresidential uses.”
Sinkler v. County of Charleston, 690 S.E.2d 777 (S.C. 2010), considered a design standard in the South Carolina planned unit development statute similar to this standard. The county rezoned a property from an agricultural to a planned unit development district, reduced the minimum lot size to one acre, but left permitted uses and the maximum number of residential dwellings unchanged. The court held that this planned unit development did not comply with the statute. The only effect and reason for the rezoning was to avoid the restrictions in the agricultural district and increase density. See my book, Designing Planned Communities (2010), https://tinyurl.com/dgnplpc.
Circulation Systems. The planned unit development ordinance should require circulation systems for development plans. A traffic circulation system can provide standards for access points, separate pedestrian and vehicular traffic, and arrange safe and convenient parking areas. When walkability is an objective, a pedestrian circulation system can provide walkability standards for pedestrian movement between major origins and destinations within and adjacent to the project.
Common Open Space. This is an essential feature of cluster zoning and can be included as an amenity in other types of planned unit development. The ordinance should indicate what types of common open space are acceptable, how much is required, where, the minimum size, and what uses and structures are allowed.
A public agency can hold and manage common open space. The other alternative is to provide in the
ordinance for forming a private homeowners association and the dedication of the common open space to the association. The ordinance should require association bylaws that make all homeowners members of the association, specify how the association should be organized, including representation and voting, authorize the association to maintain and manage the common open space, and allow the collection of necessary fees from homeowners.
Social Responsibilities. The ordinance can require the planned unit development to accept social responsibilities. For example, the ordinance
could require a certain percentage of the housing in the planned unit development to be affordable. It could also include trip capture, which requires that a certain percentage of the vehicle trips in a planned unit development must be internalized to reduce carbon emissions. Requirements such as these may be possible only in large-scale, mixeduse developments that have a variety of housing and include office and retail developments that can capture trips.
Conclusion
Planned unit development is a significant change from traditional zoning.
Getting the planned unit development ordinance right requires deciding what zoning method should be adopted and paying careful attention to the zoning structure, process, and standards that control project design and character.
See my report, Planned Unit Developments, Planning Advisory Serv. Rept. No, 545 (American Planning Association 2007), https://tinyurl.com/pudrep, and my article, New Perspectives on Planned Unit Developments, 52 Real Prop. Tr. & Est. L.J. 229 (2017), https://tinyurl.com/ pdevper. n
LITIGATING ADVERSE POSSESSION CASES: PIRATES V. ZOMBIES
By Paul Golden
2024, 279 pages, 6x9
Paperback/ebook
PC: 5431138
Price: $119.95 (list) / $95.95 (RPTE Members)
Can a neighborhood Napoleon simply take over, and become the owner of, another neighbor’s property? Any attorney even considering approaching an adverse possession case, regardless of which side, must start here. This is the first known book that focuses on just this issue—and from the litigator’s point of view. It is a one-stop shop for practitioners, with not only full descriptions of the ins and outs of the elements and potential defenses, and sample pleadings, but also various practical tips, tricks, clues, and ideas for successfully litigating these unusual cases.
CAREER DEVELOPMENT AND WELLNESS
Persistence and Confidence: The Conditions for the Rainmaker’s Perfect Storm
Developing a brand is key to your ability as an attorney to practice law in the setting you want, in the area of law you want, and with the clients you want. It gives you career freedom from any one job. Distractions and detractors (including your self-doubt) will be the most common challenges to building a brand. Having confidence and persistence, with those terms properly understood and applied, will overcome any obstacle.
Early in my career, I watched many of my contemporaries leave the practice to pursue more lucrative positions at financial institutions and family offices. Even for me, a fourth-generation practicing attorney who only wanted to practice law, I could see the temptation as the positions offered interesting work without the pressure of building and maintaining a practice. Although they had less autonomy, I perceived these positions as more secure than practicing at a law firm with inconsistent financials and struggling to eek it out every year. A senior partner at my prior firm gave me an important lesson—if you have a client base who knows you and has bought into you (i.e., your brand)—that is your security and freedom. He didn’t just give me the message—he showed me in practice. When he felt the firm was not adequately valuing his contributions, he and his clients simply left. Many of his former partners tried to talk him down to me, but all I heard was bitterness rather than a compelling brand from these attorneys who lacked confidence and, in turn, the freedom to leave themselves without the ability to generate business. Building a client base isn’t about persuading clients to hire you—it is about unabashedly showing who you are. For the clients who need you and will appreciate you, presenting your brand will bring them in. The brand will also serve as a necessary filter for the unworthy client or the client your firm isn’t the right fit for.
The biggest impediment to younger attorneys is the modern world’s distractions. The profession is not immune from the bleatings of influencers. In our profession, we see this in
Contributing Author: James I. Dougherty is a partner at Dungey Dougherty, PLLC, in Greenwich, Connecticut. He is co-chair of the Section’s Non-Tax Issues Affecting the Planning and Administration of Estates and Trusts Committee.
the ramblings of LinkedIn charlatans proclaiming the false gospel of their services and (frequently misguided) methods while seeking to persuade readers of their greatness by making up parables about things they never did or could do and encouraging you to mimic them. These people don’t know you or care about you—they care about clicks and likes. So why give them any heed? Distractions can also exist inside organizations with marketing professionals. I have been fortunate to know some incredible marketing professionals who are often underappreciated. They can’t do the job of selling you because clients want to know the attorney, and it’s your job to sell yourself. They can, however, add tremendous value by bringing unique insights from their experience of what has and hasn’t worked for others. At the same time, I have seen marketing staff who dedicated their time to justifying their value and getting perks rather than developing or deploying any skill set that could add value to the attorneys in learning how to pitch effectively. Discerning the difference between the two while navigating internal politics in a firm can be difficult for junior attorneys. The point is this—while there can be people who can help you build a brand—it is on you. If you don’t take that responsibility, you will have excuses or a few parroted phrases with no depth and not a brand—one you can monetize and the other you can’t.
Confidence
The word “confidence” has multiple connotations. In the negative sense, it can be a nicer way of saying “cocky” or to justify recklessness. That’s not what I am talking about. Confidence is not simply an outward showing—it is the unshakeable internal knowledge of one’s values and worth (including the potential and ability to evolve). So, the first question in building your brand is: Who are you? What you value, what you like doing, and who you enjoy working with (as well as the opposite of all of those things) requires careful discernment. Building a brand around who you are and not what you perceive others want you to be requires confidence. This is not a one-time exercise but one that requires periodic reflection.
I don’t pretend to know how you go through this process of self-discovery and discernment for you, but I will share what worked for me. First, give yourself some grace—it is not easy because it is so personal. When I was building my firm, there were many people and resources to provide guidance on what software, compensation model, insurance, etc., but your values and desires are on you alone. So, expect some trial and error to find what process works for you. My method was to start writing. I dug up an old notebook and just started writing, which led to many revisions of what I wanted. I wasn’t sketching out a marketing plan; this was creating the North Star (i.e., my brand) that all future decisions (including marketing) would uncompromisingly follow. Don’t dismiss or deride such an exercise as being soft or touchy-feely. My plan included how much money I wanted to make, the type of schedule I wanted, the environment that would allow me to be a good husband and father, the type of clients I liked and didn’t like, the type of projects I liked working on and those I didn’t, the methods of marketing I enjoyed, the volunteer efforts I wanted to pursue, and much more. The point is this: how can you sell what you don’t know? So, know thyself.
Confidence is not just an internal reflection exercise – looking to external examples is essential. Being humble enough to recognize there are lessons to learn from others is a showing of confidence—pretending you know it all or being too timid to ask for advice
and mentorship is cocky and reckless. Ask attorneys you have admired for some time to share their experiences and to bounce ideas off of. As a junior attorney, watch those senior to you, not to mimic but to evaluate different approaches and find what works for you. There is also life outside the law—I discovered that I had lessons to learn from clients of mine who had built their businesses and were living fulfilling lives.
Persistence
Building a brand takes time. It is not linear, and you will encounter unexpected challenges and opportunities. Overreacting or course-correcting away from that North Star you developed means the one thing you are sure to avoid achieving is what you set out to do. Indeed, it would help if you reflected on the results of your methodologies but give it time. Why should something that can define and benefit your career over decades take a moment to make? This is where the LinkedIn charlatans and unhelpful marketers produce the most distracting background noise by giving the false impression that anyone can do it and that there is a simple method that if you do X, Y, and Z, there is your brand. Instead, be grateful it is a grind because if it wasn’t, you set the bar too low given your potential. The message here isn’t to plow ahead no matter what. It is to ensure you go far enough to judge your results and make appropriate adjustments accurately.
Also, it is essential to realize that
consistency is key to branding and success because of how the outside world perceives you. For my practice and firm, our clients and our networks read from the same hymnal when they tell others about us. Because my colleagues and I are persistent and consistent in how we serve clients and carry ourselves inside and outside the firm, there is no mixed messaging, and we can be seen as authentic more easily. If you tell different sources different things in hopes of telling them what they want to hear and not what you want to say—then that approach, which derives from a lack of confidence, will filter out so that the message the market receives is not that you are good at everything but that no one (including you) knows what it is you do well.
Putting Confidence and Persistence in Practice
I encourage you to get an old notebook (or whatever works for your thought process) and start the process of planning and then building your brand. Being confident in who you are and how you live it while being persistent in doing so makes you authentic. Being authentic will make you happier and more attractive to your clients. After all, why should a client trust your legal advice when the client can’t trust who you are? Through confidence and persistence, you can build a brand and, in turn, make it rain business whenever you want, which means your practice and life won’t be subject to the currents of others who don’t share your values or value you. n
THE LAST WORD
Let’s Be Careful Out There! Words to Live by When It Comes to Generative AI
In the 1980s crime drama Hill Street Blues, Sergeant Phil Esterhaus’s morning roll call catchphrase, “Let’s be careful out there,” rings true in many circumstances and undoubtedly applies to generative artificial intelligence (AI). How is an attorney to approach AI?
Let’s harken back to the good old days of the 1970s. The first hand-held calculator was introduced in the US in 1971. Schools wrestled with how to adopt its usage. It was sometimes banned, sometimes fully embraced, and occasionally allowed only for limited functions. AI is on a similar glide path. There are five types of AI:
Reactive AI: Processes data along specific rules or algorithms; pattern recognition or mimic. Examples: Autofill for online forms and chess game apps. Artificial narrow intelligence: Performs a single task well but nothing else. Examples: Siri and Alexa.
Limited memory AI: Stores and uses past data to make decisions and improve performance over time. Example: Selfdriving cars.
Predictive AI: Uses statistical analysis and machine learning to predict future events. Examples: Amazon and Netflix.
Generative AI: Originates with the release of ChatGPT on November 30, 2022. Uses generative models to create new content, including text, images, videos, and audio. Often based on large amounts of data such as large language models. Examples: In Excel, when I err on a formula, it offers, “May I fix that for you?” When asked, some software will create content, such as writing an article or comparing items.
The Last Word Editor: Mark R. Parthemer, Glenmede, 222 Lakeview Avenue, Suite 1160, West Palm Beach, FL 33401, mark. parthemer@glenmede.com.
I recently was asked to find the similarities between wealth management (sponsoring organization) and how nutrition can ward off diminishing mental capacity (the speaker’s topic). Within seconds, AI provided five examples, three of which I adopted and expounded upon. AI can help write and even rewrite, but what are some concerns?
My prompt to ChatGPT, “Do you hallucinate?” produced the following:
Yes, AI models like me can “hallucinate” in the sense that we sometimes generate information that is inaccurate, misleading, or entirely fabricated, even though it might sound plausible. This happens because my responses are based on patterns in the data I was trained on, and I don’t “know” things like humans do. Instead, I generate responses based on probabilities derived from a vast amount of text.
My prompt to ChatGPT, “Can lawyers get in trouble for using ChatGPT?” produced the following:
Yes, lawyers can potentially get into trouble for using tools like ChatGPT, particularly if they use it in ways that violate legal ethics or professional standards. Some of the main risks include:
Confidentiality Concerns: Lawyers are bound by strict rules regarding client confidentiality. They risk violating this duty if they input sensitive client information into an AI tool because unauthorized parties could access or store the data.
Accuracy of Legal Advice: ChatGPT can provide information but is not a substitute
for legal advice. A lawyer relying on ChatGPT for legal research or advice and making decisions based on incorrect or incomplete information could harm their client and result in professional consequences.
Unauthorized Practice of Law: Lawyers could face issues if they use ChatGPT to assist in legal work but do not properly oversee the process. If the tool provides advice that the lawyer doesn’t verify or understand, it could be considered delegating legal work to a non-lawyer, which is problematic.
Ethical Obligations: Legal professionals must exercise independent judgment, and relying too heavily on an AI tool may be seen as compromising this duty. Lawyers must also provide competent representation, which includes using the right tools and understanding the associated risks.
Malpractice Liability: If a lawyer uses ChatGPT in a way that results in bad advice or errors, they could be exposed to malpractice claims, especially if their client suffers damages as a result.
Those five AI-generated items are written with confidence but may not be accurate. Horror stories of attorneys landing in hot water for relying on AI without verifying its outputs abound. In response, some courts now require affidavits affirming that AI wasn’t used or that a person thoroughly reviewed its outputs before filing. Much like the advent of calculators decades ago, AI is here to stay as a transformative tool. Rather than ignoring it or wishing it away, the savviest approach is to embrace its potential, learning to harness AI to enhance the efficiency and effectiveness of your practice. And with that, “AI rest my case.” n
THE LEASE MANUAL: A PRACTICAL GUIDE TO NEGOTIATING OFFICE, RETAIL, AND INDUSTRIAL/WAREHOUSE LEASES
SECOND EDITION
By April F. Condon, with Rodney J. Dillman
Do you ever wonder if there’s something you’re missing in negotiating a lease, why one party insists on not altering a particular paragraph, or if you need to offer an acceptable compromise that would meet the needs of all parties in a lease? The Lease Manual: A Practical Guide to Negotiating Office, Retail, and Industrial Leases answers these questions and many more.
This practical guide helps you effectively handle all stages of a commercial real estate lease transaction, from negotiation to preparation and execution of office, retail, and industrial leases. Because understanding the needs and concerns of all interested parties is the only way to facilitate and complete lease negotiations, The Lease Manual examines and explores the concerns, needs, and desires of landlords, tenants, lenders, and brokers by analyzing typical lease paragraphs from each point of view.
This updated second edition of The Lease Manual: A Practical Guide to Negotiating Office, Retail, and Industrial/Warehouse Leases, now with lead author April F. Condon, offers a fourth perspective—that of the Broker—as well as many other additions, including:
• Energy-efficient “green” building best practices
• Right of First Refusal and Right of First Offer alternatives to lease additional space in an office building
• Lease Alternatives to meet Telecommunication needs, including equipment installations that may be located exterior to the leased premises
CONFERENCE AND EXPO
April 2–5, 2025
Hyatt Regency McCormick Place
Chicago, IL
Now, more than ever, lawyers and legal professionals must seek out the newest advances in technology. Techshow 2025 is your gateway to harnessing AI’s true potential, learning all things related to the future of legal tech, and enhancing access to justice.
Join us for a week filled with CLE sessions, networking events, keynotes, and so much more.
