THIS ISSUE'S HEADLINES

Taking Care of Yourself and Your Retirement

Trust Beneficiary Forfeits Beneficial Interest After Violating No-Contest Clause

Terminating Your Interest in a Charitable Trust

In Real Estate, Proceed with Caution and a Surefire Contract

TAKING CARE OF YOURSELF AND YOUR RETIREMENT

Many people do not consider protecting assets for future long-term-care costs until they, or their spouse, requires skilled nursing care. Others are aware of the high price of such care (in some cases more than $10,000 a month) but believe that they have saved enough in retirement to defray the cost. In either case, it is a mistake to not consider planning for such costs as a component of an estate plan. A lack of such planning can result in the total depletion of a person’s assets, which they worked hard to earn and save throughout their lifetime. Particularly so since some people spend years of their lives in nursing homes.

Planning for long-term-care typically involves the creation of an irrevocable trust. The technique is to transfer assets to the trust, of which the creator of the trust (known as the grantor) is, generally, not a beneficiary. After a five-year period has elapsed, should the grantor require skilled nursing, the assets contained within the trust will not be reported on a Medicaid application. The term “five year lookback” refers to the State’s ability to review an applicant’s financial records for the sixty months prior to the date of the application to determine whether the applicant has transferred any assets of value without consideration – in other words, to determine whether the applicant has made any gifts. If the applicant has indeed made a gift, the State will deny the Medicaid application until a so-called “penalty period” has expired. The penalty period is the amount of months calculated by taking the amount of the gift and dividing it by a number called the “penalty divisor,” slightly north of $9,000 for 2020. For this reason, the earlier a person creates and funds an irrevocable trust, the better.

While the word “irrevocable” may conjure up feelings of anxiety, PLDO Partner and trust and estate attorney and litigator Rebecca M. Murphy sets straight why this should not be the case as she explains how flexibility can be built into this type of trust in her advisory, Irrevocable Trusts: Taking Care of Yourself and Your Retirement. In addition to providing clarity about how irrevocable trusts are established and function, the article includes an abundance of practical information to help you make informed decisions when it comes to protecting you and your future. To contact Attorney Murphy for further information and assistance with your estate planning needs, please call 401-824-5100 or email rmurphy@pldolaw.com.

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TRUST BENEFICIARY FORFEITS BENEFICIAL INTEREST AFTER VIOLATING
NO-CONTEST CLAUSE

Last month, the Massachusetts Appeal Court in Capobianco v. Dischino Capobianco v. Dischino, 19-P-197 (Mass. App. Ct. Jul. 9, 2020) ruled that a beneficiary forfeited his beneficial interest in a Trust established by his parents when he filed an action seeking to remove the successor Trustees and be appointed as sole Trustee. The Court held that the beneficiary, by bringing the action, violated the no-contest clause, which provided that any person who attempts to contest any provision of the Trust is deemed to have predeceased the settlors.

A no-contest clause is also known as an in terrorem clause, which is Latin for terrorize. As its name implies, if a beneficiary violates the no-contest clause, he/she will suffer the consequences set forth in the clause, which is often to forfeit his/her interest as a beneficiary.

The Court began its discussion by noting that no-contest clauses are narrowly construed because generally the law disfavors forfeitures. The Court pointed out, however, that the Trust instrument under consideration specifically prevented a beneficiary from serving as a sole Trustee. By bringing an action to remove the Trustees and to serve alone, he challenged the terms of the Trust and violated the no-contest clause. The Court notes that had the beneficiary been successful in removing the Trustees and appointing himself, the terms of the Trust regarding the succession of the Trustees would not have been carried out.

The case highlights the importance of taking great care when considering a challenge to a trustee’s actions. If the challenging party is a beneficiary and the trust contains a no-contest clause, the no-contest clause has to be reviewed carefully. In the Capobianco case, had the beneficiary sought an accounting or filed a petition seeking an interpretation of the instrument, approaches the Court noted were well within his rights, he would not have forfeited his interest. If you would like more information about this decision or need assistance with your estate and trust planning, please contact PLDO Partner Gene M. Carlino in Rhode Island at 401-824-5100 or in our Florida office at 561-362-2030 or email gcarlino@pldolaw.com.

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A charitable remainder trust (“CRT”) is typically established as an irrevocable trust with an income stream reserved for the person who creates the trust (“the grantor”). When the income stream terminates, the remaining interest in the trust is donated to a charity. A significant benefit of a CRT is that the grantor is entitled to an income tax deduction calculated on the value of the remainder interest to be distributed to the charity.

But what happens when something has changed in the grantor’s life since they established a CRT and they no longer want or need the income stream? For example, the grantor may be going through a major life event such as a divorce, remarriage, or death of a spouse. Or the grantor may be seeking liquidity or interested in leaving more money to their heirs or simply tired of the administrative hassle and expense of the CRT. One option is for the grantor to sell his or her income stream.

An individual’s income stream in a CRT is a capital asset that can be bought or sold just like any other capital asset such as stocks, bonds or real estate. Since 2000, a substantial private market has developed to buy and sell CRT income interests and reports are that sale activity for CRT income interests has surged in 2020. Generally, the sellers of their income streams are worried about their own mortality due to the COVID-19 virus and a desire to have liquidity on hand during these uncertain times and stock market volatility.

When an income stream is sold, the price is determined by computing the present value of the interest. A surprising number of individuals are seizing the opportunity to adjust their risk profile to the markets by selling their CRT income interests. If you have an income interest from a CRT and are interested in learning more about terminating the interest, please contact PLDO estate and trust attorney Jason S. Palmisano at 561-362-2030 or email jpalmisano@pldolaw.com. Attorney Palmisano will review your situation and forge a plan that can help achieve your goals.

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IN REAL ESTATE, PROCEED WITH CAUTION AND A SUREFIRE CONTRACT

While the real estate market is experiencing significant upheaval at the moment with decreased inventory and more tentative buyers, we believe there will be a reasonably quick return to status quo in the real estate market. Potentially, there will be an increase in inventory, as properties previously used for short term rentals are placed on the market. However, in the near term, and in times of limited inventory, buyers need to take a cautious approach and pause before rushing into a contract, external forces notwithstanding. Some real estate agents encourage a sense of urgency and dismiss potential issues, telling the buyers that the property will not be available if they wait. Even though many sales contracts are standard forms, opportunities are available to tailor the transaction to the individual buyer’s needs.

There are many common issues that can arise when a sales contract is not tailored to the individual needs of the parties. Often, the purchase of a new property is contingent on the sale of the buyer’s current property. If this clause is not memorialized in the contract, a purchaser can be forced to give up his deposit if the sales transaction cancels and he is unable to proceed with the purchase. This can be a costly oversight, as deposits are often up to ten percent of the purchase price.

In times of market volatility, it can be harder to procure a mortgage or liquidate assets for a cash purchase. In all cases where there is any concern about making a cash purchase, a financing contingency should be included. It is a terrible, and all too common, scenario where the market dips during the time period of the closing, and a buyer is forced to cash out while market values are depressed. If the mortgage contingency was included in the sales contract, the buyer cannot be forced to proceed to an all-cash closing. On a related note, it is also crucial to include a force majeure clause. A force majeure clause operates to excuse performance where the failure to perform results from unforeseen circumstances. A common force majeure event in Florida is a hurricane, however, the scope of inclusion under a force majeure clause is flexible and subject to the agreement of the parties.

Often sellers strive to limit the inspection period for the purchase. A buyer should ensure there is sufficient time to conduct the home inspection and receive and review the resulting reports. With the current situation regarding COVID-19, it may be harder to schedule inspections, so buyers should check with their inspectors before committing to an inspection timeframe.

In addition, buyers may wish to ensure the “right to assign” contingency is included. As failure to include the contingency could result in remedial action to title the property correctly post-closing. A common scenario arises where the contract is signed in an individual capacity, the right to assign contingency is not included, and the buyer realizes that the property should be owned by his trust. A reasonable seller would probably allow the assignment, but would not necessarily be required to do so. In all cases, it is best to make sure the property ownership is established in a way that is consistent with the buyer’s objectives and estate planning.

If you would like further information and assistance regarding a real estate contract, please contact PLDO Attorney Leah A. Foertsch at 561-362-2030 or email lfoertsch@pldolaw.com. Attorney Foertsch has been helping clients manage their real estate contracts and transactions as part of her estate and trust practice for over a decade.

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