Minnesota Resident Trust Statute is Unconstitutional; Minn. Stat. 290.01, Subd. 7b(a)(2)

In the case of MacDonald Irrevocable GST Trust v. (Minnesota) Commissioner of Revenue, Filed July 18, 2018, A17-1177 __ N.W.2d __ (Minn. 2018), the Minnesota Supreme Court found the Minnesota Resident Trust income tax statute Minn. Stat. § 290.01 Subd. 7b(a)(2) unconstitutional  under the Due Process Clause of the United States and Minnesota Constitutions. In this case, the grantor created an irrevocable trust that was a grantor trust because the grantor retained a power of substitution over the trust property. The Trust was created in 2009 with a California Trustee.  On January 1, 2012 a Colorado Trustee was appointed and finally on July 24, 2014 a Texas Trustee was appointed. For the first 30 months, the Trust remained a grantor trust subjecting the grantor to tax on all trust income. However, on December 31, 2011 the grantor relinquished his power of substitution and the Trust was no longer a grantor trust. The Trust owned S-Corporation stock of a Minnesota based company. In 2014 the Trust sold the company stock and incurred more than $250,000 in income taxes and invested the sale proceeds at an institution outside of Minnesota. The Trust filed the 2014 income tax return under protest and filed for a refund. The Tax Court found the Minnesota tax unconstitutional and the matter was appealed to the Minnesota Supreme Court.

Minn. Stat. § 290.01 Subd. 7b(a)(2) defines a resident trust as “a trust, except a grantor type trust, which …is an irrevocable trust, the grantor of which was domiciled in this state at the time the trust became irrevocable.” This case does not decide the other definition of a resident trust where the trust created by a decedent’s will domiciled in Minnesota at the time of death is a resident trust, but I suspect the reasoning of this Court will apply to that form of resident trust as well. An initial issue for the Court’s constitutional analysis is whether the Court should consider all facts and circumstances regarding the trust or whether the only issue is the grantor’s connection to the trust. While the statutory definition looks to the grantor’s domicile, the constitutional analysis requires the Court to examine all the facts and circumstances surrounding the Trust. The facts and circumstances approach is consistent with prior cases examining the constitutionality of a tax statute.

When turning to the facts and circumstances, due process is satisfied if (1) there is a “minimum connection” between the state and the person, property, or transaction subject to the tax, and (2) the income subject to the tax is rationally related to the benefits conferred on the taxpayer by the State. There is no argument that the State can tax Minnesota sourced income. That is not disputed. The question is whether Minnesota can tax all income. The State points to the following facts to justify the tax: the grantor was a Minnesota resident and domiciled here when the trust was created and became irrevocable, the trust owned stock in a Minnesota company, the trust was created by a Minnesota law firm and the original documents were held by the Minnesota law firm, the trust provides that Minnesota law controls the trust and one beneficiary was a Minnesota resident. The taxpayer points to the following facts opposing the residency status: No Trustee has been a Minnesota resident, the Trust is not administered in Minnesota, the records are maintained outside of Minnesota, other Trust income is derived outside of Minnesota, and 3 of 4 beneficiaries live outside of Minnesota. The Court found that the State’s arguments are either irrelevant or too attenuated to satisfy the due process arguments. The State arguments do not look to the party paying the tax. The Trust is paying the tax, not the grantor. The fact that the stock owned by the Trust was in a Minnesota company is irrelevant to the fact that the stock is an intangible asset located outside of Minnesota and there is no connection to the grantor. The Trust owns the stock not the grantor. While a Minnesota law firm created the Trust, the law firm did not represent the Trustees and storing an original document by the Minnesota firm was a convenience to the grantor not the trust. The pre-2014 facts that show a connection to Minnesota are irrelevant to the analysis because the Trust is the taxpayer and what is relevant is the facts in 2014 and thereafter. “The direct link between the activities that generated the income in the year at issue and the protections provided by the State in that same year establishes the necessary rational relationship that justifies the tax.” Historical contacts unrelated to the tax year is not reasonable.

The Court noted that testamentary trusts created by a will probated in Minnesota under the statute may be handled differently and cited to District of Columbia v. Chase Manhattan Bank, 689 A.2d 539, 544 (D.C. 1997)(finding it constitutional to tax a trust from a will probated in that state), and In re Swift, 727 S.W.2d 880, 882 (Mo. 1987)(probating the will in Missouri was not a sufficient nexus to tax the trusts). Thus it seems the taxation issue of a testamentary trust from a will probated in Minnesota is still an open question.

Posted in 290.01 Subd. 7b(a)(2), Constitution, Due Process, Fiduciary Income Tax, Grantor Trust, Irrevocable Trust, MacDonald, Minnesota Supreme Court, Resident Trust, Trust Income Tax, Uncategorized

Statute of limitations Minn. Stat. § 541.05, Subd. 1, ran on breach of fiduciary duty claim- be mindful of tolling by fiduciaries

Hansen v. U.S. Bank, as Special Administrator and Personal Representative of the Estate of Robert J. Hansen, Filed July 2, 2018, A17-1608 (MN.App. 2018). Seller (and his brother) was to sell property to the City in 2009. The City was to provide Seller a 5 year forecast (compiled by a CPA or other independent financial consultant) projecting revenue that will be able to pay the City’s debt service to purchase the property. Seller died November, 2009 and the Court appointed U.S. Bank (and an individual) as special administrator of the estate. The purchase agreement was amended in April, 2010. No projections were presented to the seller and the closing on the sale took place in April, 2010. The special administration was closed and the estate opened. The City financing went under and by August, 2012, payments on the note to seller stopped. The heirs sued the bank in January, 2017 alleging breach of fiduciary duty. At issue is when the statute of limitations started to run. The Court found, applying the Antone v. Mirviss, 720 N.W.2d 331 (Minn. 2006) case, that “some damage” accrued when the sale closed in 2010 because they lost their right to the projections or to re-negotiate the contract. At that point the requirement of the City to give projections ended and the sale was complete. The contract became fixed. The suit against the bank was initiated more than 6 years after the close on the sale so the statute of limitations under Minn. Stat. §541.05, Subd. 1 had run on the case. In common law, a fiduciary can toll the SOL “for fraudulent misrepresentation by silence even though there was no evidence of fraudulent statements or intentional concealment.” Toombs v. Daniels, 361 N.W.2d 801 (Minn. 1985). But the record is void of any concealment even by silence. So the tolling argument is lost.

Posted in 541.05, Subd, 1, Malpractice, Personal Representative, probate, Statute of Limitations, toll, tolled, Uncategorized

Significant Malpractice Case for Estate Planning Attorneys

Security Bank & Trust Co. v. Larkin, Hoffman, Daly, Lindgren Ltd., __ N.W.2d __ (Minn. 2018); File June 27, 2018, A16-1810. I reported this case when it was in the Court of Appeals. This Court reversed the Court of Appeals. The facts are simple. Client had attorney draft a revocable trust for client. The trust devised about 45% of the trust property to a person more than 37.5 years younger than the trustor thereby triggering a generation-skipping transfer tax (GSTT) of about $1.645 million. The allegation is that the attorney never advised the trustor about the tax or options to reduce the tax. The holding of the Supreme Court is simple but the analysis is significant. The Supreme Court held that a personal representative does not have standing to bring a malpractice claim that did not exist before the testator died but would have standing if the claim existed before death. The Court also held that the trustee of the decedent’s revocable trust did not have standing to bring a malpractice claim because a trust is not a person and therefore not an intended third-party beneficiary of the attorney-client relationship.  There is a great to deal unpack in this case.

Standing of a personal representative or trustee. Standing is a central issue. Under Minnesota law, a malpractice case survives a testator’s death (if it accrues before death). Minn. Stat. § 573.01. If damages accrue before the testator dies thereby creating a tort claim then the personal representative has standing to bring the tort claim. Minn. Stat. § 524.3-703(c). Note that contract claims can also be brought but they are subject to the non-claim statute of the probate code, Minn. Stat. 524.3-803(a), while tort claims are not included in the definition of “claims” in probate, Minn. Stat. § 524.1-201(8), and are not subject to the non-claim statute. With regard to trustees, this Court found that the trustee is not a third party intended beneficiary of the attorney-client relationship. The Court said: “[a] trust, then, is not itself a ‘thing’ or a person under the law.” Therefore it could not be the intended beneficiary of the attorney-client relationship. While the Court did leave the possibility open that a trust might be such a beneficiary in certain cases, such was not the case here.

What are the elements to a claim? First, each element of a claim must exist. In transactions such as estate planning, the elements to a claim include (1) the existence of the attorney-client relationship, (2) acts constituting negligence or breach of contract, (3) that such acts were the proximate cause of plaintiff’s damages, and (4) that but for the attorney’s conduct the plaintiff would have obtained a more favorable result in the relevant matter. In estate planning cases where a third party argues that he or she is a direct and intended beneficiary of the lawyer’s services, further analysis is needed. To be a direct and intended beneficiary, the party must be “a direct beneficiary of a transaction if the transaction has[,] as a central purpose[,] an effect on the third party and the effect is intended as a purpose of the transaction.” If that is proven then the court must then apply the Lucas v. Hamm, 364 P.2d 685 (Cal. 1961) factors to determine whether the lawyer is liable to a third party. These factors include: (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to him, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of connection between the defendant’s conduct and the injury, and (5) the policy of preventing future harm.  This Court found that a personal representative stands in the decedent’s shoes and therefore satisfies the first element of the test. The alleged facts, taken as plead, may satisfy the remaining elements of a claim in this case.

When does the claim accrue? When some damage accrues. If the personal representative (or trustee) has standing and a claim can be proven, the next big questions is: When does the claim accrue? The answer is when “some damage” accrues. If you can prove some damage occurred as the result of professional negligence then the claim has accrued. The term “some damage” is to be interpreted broadly and does not require that the majority or substantial portion of the possible damages has taken place.  However, the Court held that “some damage” included a “concrete harm created either by financial liability or the loss of a legal right” and goes on to say that in this case the decedent suffered no “material injury” to accrue damages before death. The Court found that mere reliance on bad advice is not some damage that results in an accrued claim. While it seems we only need “some damage” the Court seemed to still require some type of material injury to make a claim accrue.  So in the estate planning context, some damage can accrue while the client is alive and some damage can accrue after the client dies. If the damage accrues when the client is alive then the client can sue for malpractice while alive and the personal representative can sue for malpractice after death for the decedent. But if some damage accrues after death, it seems only the intended third party beneficiary can sue for malpractice.

Posted in 524.1-201(8), 524.3-703(c), 524.3-803(a), 573.01, Claims, Malpractice, Personal Representative, probate, Some Damage, Standing, Statute of Limitations, trust, Uncategorized

Under Minn. Stat. § 524.3-101 real property devolves at death of testator to devisee even if through a residuary clause and not a specific devise

Estate of Howard Arnold Laymon v. Minnesota Premier Properties, LLC, ___ N.W.2d ___, (Minn. 2018) filed June 21, 2018 upholding 903 N.W.2d 6, (Minn.App. 2017)(A17-0162) filed October 9, 2017. The Minnesota Supreme Court upheld the Court of Appeals decision in most respects, but did not uphold all the reasoning of the Court of Appeals. The facts in this case are quite cumbersome related to the transfer of title between subsequent parties with multiple names. Dad bought the property with a mortgage. Dad died. Before the estate was probated foreclosure action was started. The will devised everything in equal shares to the kids. Before the probate was started, one of the kids deeded his interest in the property to a third party for $10,000 (and the deeded interest changed hands in various ways after that). The sister then started a probate. The sister sought a quiet title/slander of title claim against the 3rd parties. The general argument was that the brother could not deed his interest in the land to the third parties because the real estate was still “subject to administration.” The court did a nice job of slowly going through the points of law.  First, Minnesota law is quite clear that title to real estate vests at death. In re Beachside I Homeowners Ass’n, 802 N.W.2d, 771 (Minn.App. 2011)(a decree is not needed before title vests); Bengtson v. Setterberg, 35 N.W.2d 623 (Minn. 1949); now codified in Minn. Stat. § 524.3-101. That code provision states that: “Upon death, a person’s real and personal property devolves to the persons to whom it is devised by last will…”.  The Supreme Court held that the persons to whom the property devolves includes the residuary beneficiaries of an estate.  But the argument was made that since the Personal Representative has the power of administration that the devisee under the will cannot convey title. The court of appeals found that the personal representative has “power over the property” not title over the property.  Hence, title is encumbered during administration (which can result in divestment of title by sale for example) but the devisee has title and the PR has power over title. Title vests at death and the PR’s right to administration does not prevent the vesting of title.  But the Supreme Court ruled that it did not have to answer that question because the personal representative never exercised any powers of administration over the property inconsistent with the respondent’s interests, so the issue is not before the court. The statute does not create exceptions for residuary beneficiaries that result in a lapse of title or loss of title. The district court summary judgment is reversed in part to reflect the effect of this holding and remanded for further proceedings.

Posted in 524.3-101, Personal Representative, probate, Uncategorized, vesting

Election against the will was late and waived by agreement

In the Matter of the Estate of: Martha R. Houle DeHaven et al, A17-1762 filed June 11, 2018 (MN.App. 2018). The wife died in 2015. The husband had signed a consent and waiver of the elective share 6 years before the decedent died. On January 10, 2017 the husband tried to file to elect against the will. The election was not filed within 6 months of the date the will was probated.  Under Minn. Stat. §524.2-211(a) the election was late because it was not filed within 6 months of probating the will. While a court can extend this time limit (In re Estate of Kruegel, 551 N.W.2d 718) the court did not abuse its discretion to deny the extension.

Posted in 524.2-211, Augmented Estate, Election Against The Will, Elective Share, probate, Waiver

Minn. Stat. § 524.2-804 Subd. 1 disinheriting spouse as beneficiary of a life insurance contract can apply retroactively without violating the contracts clause of the United States Constitution

Sveen v. Melin, June 11, 2018, 584 U.S. ____ (2018). Husband and wife were married in 1997. In 1998 husband purchased life insurance and named his wife as beneficiary and kids of a prior relationship as contingent beneficiaries. In 2002 Minnesota adopted Minn. Stat. § 524.2-804 which disinherits spouses from beneficiary designations upon divorce. It provides “the dissolution or annulment of a marriage revokes any revocable…beneficiary designation…made by the individual to the individual’s former spouse.” In 2011 the couple divorced. The beneficiary designation was not changed and the divorce decree made no mention of the insurance policy. At issue is whether a divorce under state law disinherits a spouse by retroactively applying the statute. The related question is whether the statute violates the Contracts Clause of the United States Constitution, Art. I, §10, Cl. 1. The Contracts Clause does not prohibit all laws affecting contracts, El Paso v. Simmons, 379 U.S. 497, 506-507. There is a two-step analysis to determine if the contract clause is violated. First, we examine whether the state law “operated as a substantial impairment of a contractual relationship.” Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244. To analyze the first test, the court examines (1) the extent that the law interferes with a party’s reasonable expectations, (2) undermines the contractual bargain, and (3) prevents a party from safeguarding or reinstating their rights. If there is a substantial impairment to the contract, then step two examines whether the law is an appropriate and reasonable method to advance a significant and legitimate public purpose. Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411-412. In general the argument for the ex-wife is that the statute voids the ex-wife as beneficiary even if he wanted ex-wife to remain as beneficiary and that if the husband wanted the ex-wife to get the insurance after a divorce, then he has to fill out a new beneficiary designation form and that is too burdensome and therefore unconstitutional. The kids argue, and the Court agrees, that the statute is actually intended to protect the probable intent of the decedent and that in most cases the preference is to revoke the beneficiary designation of the ex-spouse. In this case, a default rule such as revoking a spousal designation does not unduly interfere with the contract and works to protect the contract. The law can be applied retroactively.

Posted in 524.2-804, Constitution, Contracts Clause, Life Insurance, Uncategorized, United States Constitution

Revenge Obituary

You have probably seen it. An obituary that was not complementary of the the deceased. I have no doubt that this will start a new trend of people taking a last jab at someone they don’t like. To me the issue isn’t whether the deceased deserved the scorn. To me, the issue is the lost sanctuary of the obituary column in the paper. Like a cemetery or a church, there were certain places that enjoyed the mutual respect of the community that this is a place for respect and if you have disrespect to offer, please take it somewhere else. No one is saying you have to sing someone’s praises, but if you must denigrate, even if justifiably, please do so in a forum where that can be expected, and allow the places of respect to remain respectful. It is arguable that a person was not entitled to the sanctuary or a place of respect like the obituary column, but for the sake of those who do deserve respect it would be nice if we allowed this respectful tradition to remain safe. I am reminded of festivus, the agnostic ritual celebrated by the Costanza family in Seinfeld. Perhaps someone may want to start a place to disrespect the dead, an “airing of the grievances” type of place where a person can vent about the dead. I feel like this is a million dollar idea that I will not capitalize on. One note about some practical issues with a revenge obituary. You may realize that I did not provide a link to the obituary in question. I think people should be mindful of libel/defamation. It has been often said that you can’t defame a dead person. But in this obituary, third parties were also referenced. Also, in some states, there are now rights of the deceased in their lifetime persona such as for celebrities. I don’t know if the deceased was a celebrity in the case in question, but some states do have rights for the deceased. There are also issues related to public disclosure of private facts. These things give me enough pause to make me think twice before I might publish a revenge obituary.

Posted in Revenge Obituary, Uncategorized