Settlement Agreement is enforced even when formal agreement is not finalized.

Settlement Agreement and Memorandum of Understanding is an Enforceable Agreement, Minn. Stat. § 572.35 Subd. (1)1, and Personal Representative could settle the claim under Minn. Stat. § 524.3-715(27) without satisfying Minn. Stat. § 524.3-912 even when settlement altered distributions of estate. Estate of: Steven C. Kukowski, Decedent, A18-0217 August 27, 2018. Mom died and her estate was opened. After mom died, her son, Steven died. Mom’s estate sought to recover about $200,000 from Steven’s estate. It alleges Steven took many guns, a boat, motor, diamond ring, Indian Artifacts and other items from their mother before she died. The mother’s estate and Steven’s estate entered into a mediated settlement agreement. The agreement explicitly laid out several binding points in the memorandum of understanding and specifically said the agreement was binding although it did acknowledge that other details would be finalized in a separate agreement. The parties could not get to a final separate agreement. Steven’s estate returned much of the property but did not complete all terms of the contract. Steven’s estate sued to enforce the agreement. First, the court noted that this is a valid agreement under Minn. Stat. § 572.35 Subd. (1)1. The terms of the memorandum of understanding were sufficient enough to be enforceable. One of the heirs to the mother’s estate continued to object arguing that she was not a party to the settlement agreement so it is not enforceable under Minn. Stat. § 524.3-912. The court noted that this was an agreement between the two estates and not an agreement between the heirs. The personal representative had authority to “settle matters for the estate and its heirs” under 3-715(27) and whether that settlement affects the ultimate distribution of the mother’s estate is not before the court at this time. If the heirs try to settle the estate that is governed by 3-912, but when a PR settles a claim that is governed by 3-715 even if part of the settlement alters distribution of the estate.

Posted in 524.3-715(27), 524.3-912, 572.35 subd. 1, Memorandum of Understanding, Settlement Agreement, Uncategorized

UPDATE: Appeal to the US Supreme Court on Whether the Minnesota Resident Trust Statute is Unconstitutional; Minn. Stat. 290.01, Subd. 7b(a)(2)

While the filing process continues for the Fielding case (response brief Due January 21, 2019) the SCOTUS has agreed to hear a North Carolina Case, Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, regarding the state’s ability to tax a trust where the only connection is that the beneficiary is a resident of the state. If the SCOTUS took this case, I bet there is a good chance it takes the Fielding case as well to address the complex constitutional issues inter-state trust taxation implicates. This should get interesting!

The Minnesota Attorney General has filed a Petition for Writ of Certiorari asking the US Supreme Court to review the decision of the Minnesota Supreme Court that struck down the Minnesota Resident Trust Statute. The Petition is attached as Minn Cert Petition to Supreme Court. The taxpayer response brief is due January 21, 2019. In the Petition the Attorney General argues that Minnesota’s tax revenue is imperiled by the Supreme Court decision. It argues that Minnesota collected $117.1 million in trust tax revenue in 2016 and is facing more than 300 refund claims due to the recent decision. The Petition argues that there is a split in jurisdictions in how the due process clause is interpreted in tax cases. The Petition argues that 5 states deny taxation on trusts administered outside the jurisdiction and that 4 states allow taxation on trusts administered outside the jurisdiction. They argue that split should be reconciled by the Supreme Court.

In the case of Fielding v. (Minnesota) Commissioner of Revenue, filed July 18, 2018, A17-1177; 916 N.W.2d 323 (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 as applied to this case. 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) defines two forms of a resident trust, (1) a trust created by will (not reviewed in this case), and (2) 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” and that the trust became irrevocable after January 1, 1996. This second definition is of a resident trust is the matter subject to review. 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 of this case, 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 whether the state can tax Minnesota sourced income. That is not disputed. The question is whether Minnesota can tax all income including income not sourced in Minnesota. 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 are not relevant. The tax was found to be unconstitutional.

This case does not decide the constitutionality of a tax upon a resident trust “created by a will of a decedent who at death was domiciled in this state” (Minnesota). The Court noted that testamentary trusts created by a will probated in Minnesota under the statute may be analyzed differently than this case. The Court 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) to highlight two possible conclusions if and when this second definition of a resident trust is analyzed. Thus it seems the taxation of a testamentary trust created under a will probated in Minnesota is still an open question.

Implications: This case rejects domicile as a justification for taxation and looks to minimum contacts to justify taxation. This creates obvious concerns for Minnesota trustees who administer trusts created in other states and whose grantor was not from Minnesota. Those trustees may need to start filing Minnesota tax returns because the trustee lives in Minnesota or administers the trusts in Minnesota. For trusts that are not administered in Minnesota and have no connection to this state, the trustees may want to strongly consider amending prior tax returns to seek refunds where the only connection to Minnesota was the domicile of the grantor. But the most compelling implication is the anticipated legislative response to this case. It is firmly anticipated that Minnesota will respond to this case with legislation that adopts a minimum contacts and benefits received approach to taxation. Such a definition of resident trust may cast an even wider net than the current definition of a resident trust under the statute. While this case is a victory for these parties, Minnesota attorneys, accountants and trustees may find that trusts begin an immediate exodus from the state to sever all minimum connections with the state to keep the trust from falling under a new resident trust statute. If minimum connections becomes the new tax test, local professionals may find themselves watching their clients sever all ties to save taxes. That is good for the trust but bad for Minnesota professionals.

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