© 2016 by Joan E. Emery
You create a revocable trust (sometimes called a “living trust”) and transfer various assets into that trust. In the trust agreement, you are the initial trustee and you name your brother Tom as the first successor trustee in case you cannot or do not want to act as trustee at some point during your life. If you continue to act as trustee throughout your life, Tom is named as the successor trustee when you pass away (or you may have created a trust under your will and named Tom as trustee of that testamentary trust). While you are the trustee of your revocable trust, you have the authority to deal with the trust property as you determine. But what happens if Tom becomes trustee during your life or at your death?
Tom, if he becomes successor trustee, will be a fiduciary. You wonder, “Great, but what does that mean? And, what are Tom’s rights and responsibilities regarding the property in my trust and the beneficiaries of my trust?” The word “fiduciary” comes from the Latin word “fiducia” which means trust or confidence. When acting as a fiduciary, a person or business (e.g. a bank trust company) must act for another with the upmost trustworthiness, good faith, and honesty. There are various types of fiduciary relationships, such as guardian/disabled person, principal/agent, executor/beneficiaries, and trustee/beneficiaries. This blog post and several subsequent posts will focus on the trustee/beneficiaries fiduciary relationship.
When acting as trustee of your trust, Tom has certain rights. These rights are generally referred to as the trustee’s powers. Tom, as trustee, also has certain responsibilities. These responsibilities are generally referred to as the trustee’s duties. Where do Tom’s powers and duties come from? Most often, the trustee’s powers and duties are specified in the trust agreement. For example, many trust agreements contain a list of the powers and duties of the trustee. Some powers which are frequently included in a trust agreement are the powers of sale, retention of assets, investment of assets, and payment of expenses and taxes. Some duties which are often included in a trust agreement are the duty of loyalty, the duty of prudence, and the duty to account.
There are limits on the powers and duties which the person creating the trust (often referred to as the “settlor” or “grantor”) can include in a trust agreement. These limits take two forms – specific statutes and relevant case law. For example, the Illinois Trusts and Trustees Act (“Act”) permits the settlor to specify the rights, powers, duties, limitations, and immunities applicable to the trustee, beneficiaries, and others, and specifies that those provisions in the trust agreement will control so long as those provisions are not contrary to law. 760 ILCS 5/3(1). This means that the language of the trust agreement controls unless the trust agreement contains an illegal or improper purpose, power, or duty.
How is it determined whether the language in a trust agreement is contrary to law? I will use Illinois law as an example. First, if an Illinois statute prohibits a certain trust provision, then that trust provision is obviously contrary to law. Second, Illinois has a body of common law which also describes various duties and powers of a trustee. Illinois common law is generally defined as the rules established by cases decided by the judicial branch of our state government. The relevant Illinois statues and case law are said to embody the public policy of our state. Language in a trust agreement specifying the trustee’s powers or duties in a manner which conflicts with the public policy of Illinois will not be enforced by Illinois courts.
So how will you and Tom know what is expected of him if he becomes the successor trustee of your trust? Next time I will discuss some key powers and duties of a trustee and the interrelationship among the trust instrument, the Act, and Illinois common law.
© 2016 Joan E. Emery
It is estimated that by 2050, there will be more Facebook accounts for deceased users than for living users. It has also been estimated that a person now in his or her twenties has a 1 in 4 chance of being disabled for at least 3 months. The interrelationship between digital assets, disability, and death highlights the importance of the Illinois Revised Uniform Fiduciary Access to Digital Assets Act (2015) (the “Act”). My last two blog posts discussed the legislative history of the Act, some key definitions contained in the Act, and a sample of the statutory requirements for a fiduciary to access a user’s digital assets. I will discuss some additional important provisions of the Act and I will reply to the question of whether the Act should scare us.
This discussion will focus on four additional important provisions of the Act. The first of these provisions is Section 3 of the Act. This section describes what the Act does and does not apply to. For example, the Act applies to (1) a fiduciary acting under a will or power of attorney regardless of when it was executed, (2) a personal representative acting for a decedent, regardless of the date of death of the decedent, (3) a guardianship proceeding, regardless of when the proceeding was commenced, and (4) a trustee acting under a trust, regardless of when the trust was created. The Act does not apply to a digital asset of an employer, when used by an employee in the ordinary course of the employer’s business.
Another important provision of the Act is Section 4, which discusses disclosure of digital assets by means of an online tool, a will, trust, power of attorney, other record, or a terms-of-service agreement. According to Section 4, under some circumstances, an online tool trumps all other methods of directing disclosure. For example, if the online tool allows the user to modify or delete the direction at all times, a direction using an online tool overrides a contrary direction in a will, trust, power of attorney, or other record. If the user has not used an online tool or the custodian has not provided one, then the direction in a will, trust, power of attorney, or other record controls. If neither an online direction nor a direction in a will, trust, power of attorney, or other record exists, then the applicable provision (if any) in a terms-of-service agreement will control disclosure.
Section 15 is titled “fiduciary duty and authority” and it seems to focus on two aspects of a fiduciary’s potential duties, namely, (1) access to digital assets stored in the computers of a decedent, disabled person, principal, or settlor, and (2) the ability of a fiduciary to terminate a user’s digital assets account (e.g. email account, Facebook account, etc.).
“Custodian compliance and immunity” is the title of Section 16 and this section governs the custodian’s actions in the following 5 situations:
1. Not later than 60 days after receipt of the information required under Sections 7 through 15, the custodian must comply with the request from a fiduciary or designated recipient to disclose digital assets or to terminate an account;
2. A custodian may notify a user that a request for disclosure or termination has been made;
3. A custodian may deny a fiduciary’s or designated recipient’s request for disclosure or termination if the custodian is aware of lawful access to the account following receipt of the request;
4. A custodian may obtain or may require the fiduciary or designated recipient to obtain a court order which (a) specifies that the account belongs to the disabled person or principal, (b) specifies that there is sufficient consent from the disabled person or principal to support the requested disclosure, and (c) contains a finding required by law other than the Act; and
5. A custodian and its officers, employees, and agents are immune from liability for any act or omission done in good faith, except for willful and wanton misconduct, in compliance with the Act.
What is and what is not scary about the Act? In my opinion, the goal of creating a mechanism which permits a user to specify a fiduciary or designated recipient to administer the digital assets of that user is an excellent goal. However, in my opinion, the scary parts of the Act are the significant complexity to the Act and the numerous protections for custodians included in the Act. Although perhaps not realistic, in my opinion, a simpler version of the Act, focused more on users and their fiduciaries and less on custodians, would be a better (and arguably, not scary at all) version of the Act.
© 2016 Joan E. Emery
The Revised Uniform Fiduciary Access to Digital Assets Act (2015) (the “Act”) can be divided into approximately 5 parts. Those parts are preliminary matters (§§1-6), procedures for disclosure of digital assets (§§7-14), duties and authority of the fiduciary and the custodian (§§15-16), and administrative provisions (§§17-21 – however, at this time, section 17 is blank).
This discussion will focus on the procedures for disclosure of digital assets contained in Sections 7 through 14 of the Act. Sections 7 and 8 address disclosure of digital assets of a deceased user. Sections 9 and 10 are concerned with disclosure of digital assets of a principal under a power of attorney. Sections 11 through 13 are directed at digital assets held in trust. Finally, Section 14 addresses the disclosure of digital assets to a court appointed guardian. For a probate estate, an agency relationship under a power of attorney, or a trust, the disclosure of digital assets is divided into two parts – disclosure of content of electronic communications and disclosure of other digital assets. “Content of an electronic communication” is defined in Section 2 of the Act as “information concerning the substance or meaning of the communication which (A) has been sent or received by a user; (B) is in electronic storage by a custodian providing an electronic-communication service… or providing a remote-computing service…; and (C) is not readily accessible to the public.” Section 2 of the Act also defines a “digital asset” as “an electronic record in which an individual has a right or interest.”
If a fiduciary is seeking disclosure of digital assets, it is absolutely necessary to read the statute carefully, because the disclosure requirements can be quite extensive. As an example, let’s look at Section 7 of the Act which contains the longest list of disclosure requirements. Section 7 controls disclosure of the contents of electronic communications of a deceased user.
Section 7 of the Act contains the following requirements, which must be complied with in order for the custodian to disclose the contents of electronic communications to the personal representative of a deceased user’s estate:
A. The deceased user consented to the disclosure; or
B. A court directs disclosure; and
C. The personal representative gives the custodian:
(1) A written request for disclosure in physical or electronic form;
(2) A certified copy of the death certificate of the user;
(3) A certified copy of the letter of appointment of the personal representative or a court order;
(4) Unless the user provided direction using an online tool, a copy of the user’s will, trust, power of attorney, or other record evidencing the user’s consent to disclosure of the contents or electronic communica-
(5) If requested by the custodian, the personal representative provides:
A) A number, username, address or other unique subscriber or account identifier assigned by the custodian to identify the user’s account;
B) Evidence linking the account to the user; or
C) A finding by the court that:
i) The user had a specific account with the custodian, identifiable by the information specified in subparagraph A);
ii) Disclosure of the content of electronic communications would not violate 18 U. S. C. Section 2701 et seq., as amended, 47 U. S. C. Section 222, as amended, or other applicable law;
iii) Unless the user provided direction using an online tool, the user consented to the disclosure of the content of electronic communications; or
iv) Disclosure of the content of electronic communications of the user is permitted under this Act and [is] reasonably necessary for the administration of the estate.
In order to determine which documents must be presented to the custodian, the first question which must be asked is, What constitutes consent to disclosure of the contents of electronic communications by the deceased user? It appears that the grant of a broad power to the fiduciary to administer the deceased user’s assets is not sufficient, and, instead, the digital asset powers granted to the fiduciary must specifically described or defined. Arguably, the simplest way to describe or define the digital asset powers granted is to refer to the Act and perhaps even to various provisions of the Act. Second, if the deceased user did not consent to the disclosure of the contents of electronic communications by using an online tool or by providing specific consent in his or her will, trust, power of attorney, or other record, can the custodian disclose this information? In the absence of consent, Section 7 appears to require that a court order must direct disclosure and must contain specific findings, including findings that disclosure is permitted under the Act and is reasonably necessary for the administration of the estate.
© 2016 Joan E. Emery
There are 19 states which have some form of access to digital assets law. Illinois became one of those states on August 12, 2016 when Governor Rauner approved House Bill 4648. This new Illinois law is a significant step forward in the process needed answer questions such as, What constitutes a digital asset? and Who owns or controls those digital assets? The Illinois Revised Uniform Fiduciary Access to Digital Assets Act (2015) (the “Act”) has a somewhat strange name apparently because the Uniform Fiduciary Access to Digital Assets Act was first presented in Senate Bill 1376, which was introduced on February 28, 2015. Senate Bill 1376 passed the Illinois Senate on April 22, 2015, but did not pass the Illinois House and “died’ in the Rules Committee. After the failure of Senate Bill 1376, House Bill 4648 was introduced on February 2, 2016. House Bill 4648 named the potential new act the “Revised Uniform Fiduciary Access to Digital Assets Act (2015),” apparently to distinguish it from the original proposed act and perhaps to link the new proposed act to the prior proposed act.
HB 4648 provided specific procedures and requirements for the access to and control by guardians, executors, agents, and other fiduciaries of the digital assets of persons who were either deceased, under a legal disability, or subject to the terms of a trust. Unlike SB 1376, HB 4648 was more or less “fast tracked.” HB 4648 passed the House on April 22, 2016. A Senate amendment was added to the bill and, as amended, the bill passed the Senate on May 24, 2016. The bill then went back to the House for consideration of the Senate amendment and the House concurred in the Senate amendment on May 29, 2016. The bill was sent to the Governor on June 27, 2016. On August 12, 2016, the bill was approved by Governor Rauner and became Public Act 99-0775.
The Act is 8 pages of single-spaced text, so there’s plenty to read. The Act has 21 separate sections and Section 2 of the Act contains 27 definitions. I will devote several blog posts to this new Act, since there is significant new information to digest. This blog post will focus primarily on the definitions contained in the Act. These definitions specify what is and what is not included within the scope of the Act.
The Act’s 27 defined terms are the following: account; agent; carries; catalogue of electronic communications; guardian; content of electronic communications; court; custodian; designated recipient; digital asset; electronic; electronic communication; electronic communication service; fiduciary; information; online tool; person; personal representative; power of attorney; principal; person with a disability; record; remote-computing device; terms of service agreement; trustee, user; and will.
In my opinion, 10 of the most important definitions are catalogue of electronic communications, custodian, digital asset, electronic communication, fiduciary, information, person, record, remote-computing service, and user. A summary of the definitions of these 10 terms is as follows:
1. Catalogue of Electronic Communications – information that identifies each person with whom the user has an electronic communication, including the time and date of the communication and the electronic address of the person;
2. Custodian – a person who carries, maintains, processes, receives, or stores a digital asset of a user;
3. Digital Asset – an electronic record in which an individual has a right or interest;
4. Electronic Communication – as defined at 18 U. S. C. §2510(12), as amended. 18 U. S. C. §2510 is part of the Electronic Communications Privacy Act of 1986. Section 2510 contains definitions. Section 2510(12) defines “electronic communication” as a transfer of signs, signals, writing, images, data, or intelligence of any nature transmitted in whole or in part by a wire, radio, electromagnetic, photoelectronic or photooptical system that affects interstate or foreign commerce;
5. Fiduciary - an original, additional, or successor personal representative, guardian, agent, or trustee;
6. Information – data, text, images, videos, sounds, codes, computer programs, software, databases, “or the like;”
7. Person – an individual, estate, business or nonprofit entity, public corporation, government or governmental subdivision, agency or instrumentality, or other legal entity;
8. Record – information inscribed on a tangible medium or stored in an electronic or other medium that is retrievable in perceivable form;
9. Remote-Computing Service – a custodian that provides to a user computer-processing services or the storage of digital assets by means of an electronic communications system, as defined in 18 U. S. C. §2510(14), as amended. Section 2510(14) defines “electronic communications system” as any wire, radio, electromagnetic, photooptical, or photoelectronic facilities for the transmission of wire or electronic communications and any computer facilities or related electronic equipment for the electronic storage of such communications; and
10. User – a person who has an account with a custodian.
Although these definitions are sometimes convoluted, the obvious intent of the Act is to create specific mechanisms by which a trustee, agent under a power of attorney, guardian, executor, or other personal representative can access and administer the digital assets of a person who can no longer administer those assets for himself or herself. Next time I will discuss some of the specific procedures and requirements for the access to and control of digital assets by guardians, power of attorney agents, executors, and other fiduciaries.
© 2016 Joan E. Emery
Drafting legislation can be difficult. Often, once a bill becomes a law, it takes several amendments to produce a law which is reasonably satisfactory. Although Article IVa of the Illinois Probate Act became effective on January 1, 2015, there are problems with this Article which should be addressed by the Illinois legislature.
When evaluating a law, it’s often helpful to ask, What have other states done? At least 3 other states have laws regarding financial abuse of elders by caregivers (and sometimes by others). California enacted a prohibition against gifts to people in fiduciary relationships with elders in 1993 and that prohibition has been expanded in several respects since 1993. The California statutory plan now protects dependent adults, not just elders. Nevada’s statutory plan also protects dependent adults. Maine has a statutory plan which only protects elderly, dependent persons. Each state has unique aspects to that state’s statutory plan to limit and, ideally, to prevent financial abuse of those who are not able to adequately protect their own financial interests.
Two key aspects of the California, Nevada and Maine statutes will be considered. The first aspect is, Does the statutory plan provide a specific way to negate the presumption of wrongdoing by the presumed financial abuser?
California has the most elaborate statutory plan for dealing with presumptively void transfers. Section 21382 of the California Probate Code excludes transfers to certain persons or entities and certain types of property transfers. A significant exception to presumption of wrongdoing is contained in Section 21384 of the California Probate Act, which provides that presumption does not apply if the transfer instrument is reviewed by an independent attorney who counsels the transferor regarding various aspects of the proposed transfer, attempts to determine if the proposed transfer is the result of fraud or undue influence, and completes and delivers to the transferor a Certificate of Independent Review.
Section 155.0975 of the Nevada Revised Statutes exempts transfers to certain persons or entities, certain types of transfers, and transfers which are determined by a court to be permitted transfers. Section 155.0975 also has a specific exception to the presumption if an independent attorney counsels the transferor about the proposed transfer, attempts to determine if the proposed transfer is the result of fraud, duress, or undue influence, and completes and delivers to the transferor a Certificate of Independent Review.
In contrast, section 1022 of Title 33 of the Maine Revised Statues requires the elderly dependent person (or that person’s representative) to raise the presumption of undue influence by a preponderance of the evidence. Apparently this means that the elderly dependent person must establish that there was a transfer of real estate or a major transfer of personal property for less than full consideration by an elderly dependent person to a person with whom the elderly dependent person had a confidential or fiduciary relationship. Section 1022 then provides that the presumption of undue influence arises, unless the elderly dependent person was represented in the transfer or execution by independent counsel.
It’s clear that each of these 3 statutory plans creates an exception to the presumption if the transferor was represented by independent counsel. The statutes do vary regarding what independent counsel is required to do in order to meet the requirements of the statutory exception.
As discussed in one of my earlier blogs, Senate Amendment 001 to Illinois Senate Bill 1048 contained a provision which stated that the presumption of void transfer did not apply if an independent attorney reviewed the transfer instrument and then certified that he or she was not associated with the interest of the transferee and had 1) reviewed the transfer instrument prior to it being signed, 2) counseled the transferor on the nature and consequences of the transfer, and 3) concluded that the transfer instrument was valid because it was not the product of fraud, duress, or undue influence. In my opinion, the attorney certification contained in Senate Amendment 001 went too far.
In California and Nevada, the independent attorney must 1) counsel the transferor about the nature and consequences of the potential transfer, 2) attempt to determine if the potential transfer is the result of fraud or undue influence (Nevada adds duress), and 3) execute the certificate of review (and California adds that the original certificate of review must be delivered to the transferor). In my opinion, a certificate of review by an independent attorney should be added to Public Act 98-1093, but the attorney should only be required to attempt to determine if the proposed transfer is the result of fraud, duress, or undue influence, not to state conclusively that the proposed transfer was not the result of the previously mentioned wrongful acts. The language of Senate Amendment 001 placed an almost impossible burden on an attorney to know conclusively that the transferee did not engage in wrongdoing.
Another significant problem with the Illinois statute is that if the presumption of void transfer is not rebutted, the entire transfer document is void. For example, under the current Illinois statute, if a will contains a gift to a caregiver, the presumption applies, and the presumption is not overcome, the entire will is void, not just the provision making the gift to the caregiver. In the other three states that have similar statutory plans, the language of these statutes is directed against the specific transfer and generally not against the entire transfer document. The Illinois provision should be amended to presume only that the gift to the caregiver is void and not the entire transfer document.
Illinois House Bill 3325, introduced on February 26, 2015, attempted to address this second problem. This bill substituted the word “transfer” in every place where the words “transfer instrument” appeared. House Bill 3325 also made some additional minor changes in P. A. 98-1093, but did not address the attorney certification problem. On the day that it was introduced, House Bill 3325 was referred to the Rules Committee and it never emerged from that committee. Since the Illinois legislature will deal almost exclusively with vetoed bills when the two houses reconvene after the election, it is virtually guaranteed that House Bill 3325 will not be voted on and will “die” in the Rules Committee. This bill may be reintroduced in the next general assembly, a substantially different bill may be introduced, or there may be no further attempts to change P. A. 98-1093 when the 100th General Assembly convenes in 2017. We can only wait and wonder.
Next time I will discuss the Illinois Fiduciary Access to Digital Assets Act. Do you have a topic you would like to see discussed in a future blog? If so, please put any appropriate topics in the Comments section provided below.
© 2016 Joan E. Emery
Article IVa is titled “Presumptively Void Transfers” and contains 7 sections. Article IVa includes the following sections: definitions; a presumption of void transfer; exceptions; effect on the common law; attorney’s fees and costs; a limit regarding the duty of financial institutions and others; and an applicability section. Article IVa was intended to protect persons receiving care from financial overreaching by certain caregivers.
Section 5/4a-5 defines the following 5 terms: caregiver; family member; transfer instrument; transferee; and transferor. “Caregiver” is defined broadly to include a person who has assumed responsibility for all or a portion of the care of another person who needs assistance with daily living activities. The caregiver may be paid or unpaid. Caregiver does not include a family member. “Family member” is defined as a spouse, child, grandchild, sibling, aunt, uncle, niece, nephew, first cousin, or parent. “Transfer instrument” is limited to a legal document which is intended to transfer property on or after the transferor’s death. It’s important to note that the concept of presumptively void transfers only applies to transfers intended to take effect on or after the death of the person who makes the property transfer to the caregiver. Thus, transfers which take effect during the lifetime of the transferor, although subject to other legal challenges, would not be subject to the rules imposed by Article IVa.
Article IVa’s presumption of void transfer is contained in section 5/4a-10. This section provides that, in a civil action challenging the transfer instrument, unless the exceptions of section 5/4a-15 apply, there is a rebuttable presumption that the transfer instrument is void if the transferee is a caregiver and the value of the transferred property exceeds $20,000. There are 4 requirements in order for the rebuttable presumption to apply: 1) the transferee must be a caregiver; 2) the value of the property must exceed $20,000; 3) there is a civil action challenging the transfer instrument; and 4) neither of the two section 5/4a-15 exceptions applies. A rebuttable presumption generally means that sufficient facts to prove a factual issue are presumed to have been proven without the need to produce any evidence. Since the presumption is rebuttable, the Article IVa presumption that the transfer instrument is void can be overcome if the caregiver produces sufficient evidence. But how much evidence is sufficient? Section 5/4a-15 provides some answers to that question.
Section 5/4a-15 states that the rebuttable presumption can be overcome if the caregiver proves to the court: 1) by a preponderance of the evidence that the caregiver’s share under the transfer instrument is not greater than the share the caregiver was entitled to under a transfer instrument in effect before the caregiver became the caregiver; or 2) by clear and convincing evidence that the transfer was not the product of fraud, duress, or undue influence. It is important to note that section 5/4a-15 presents two different standards of proof. If the caregiver received the same share under a transfer document in effect before the caregiver became the caregiver, then the standard is a preponderance of the evidence. A preponderance of the evidence standard would generally require the caregiver to present some evidence, which when viewed favorably to the caregiver’s position, would allow a reasonable trier of fact to conclude that the required factual element was proven. For example, proof of a prior will dated before the date when the caregiver became the caregiver should be sufficient proof. In contrast, the standard of proof required to overcome the presumption that the transfer is void due to fraud, duress, or undue influence is clear and convincing evidence, which is a higher standard of proof and requires the presentation of more relevant evidence in order to meet that standard.
If a person receiving care, who has sufficient mental capacity and is not subject to fraud, duress or undue influence, wishes to provide for a gift to a caregiver in excess of $20,000 which will take effect at or after death, then an effective way for the person to do so is for that person to meet with his or her independent legal counsel and express his or her wishes in regard to the caregiver. The client and his or her attorney can then decide how best to move forward to implement the plan. The presence of independent legal counsel who actively interviews his or her client, assesses competence, discusses options, memorializes the client’s wishes and motivations, and assists in implementing a plan, etc. will go a long way toward creating the proof needed to rebut the presumption that the transfer instrument is void. The attorney for the person who wishes to make the transfer must also consider the impact of various evidentiary issues.
Section 5/4a-20 provides that “nothing in this Article precludes any action against any individual under the common law, or any other applicable law, regardless of the individual’s familial relationship with the person receiving assistance.” Some of the common law actions which were and continue to be available are actions for fraud, duress, and undue influence.
It is relatively uncommon for an Illinois statute to provide for the payment of attorney’s fees and costs, but section 5/4a-25 specifically provides that if the caregiver is not successful in overcoming the presumption of void transfer, then the caregiver pays the costs of the proceeding, including reasonable attorney’s fees. This means that if the caregiver fails to overcome the presumption, the caregiver pays his or her attorney’s fees and costs and also the attorney’s fees and costs of the person who challenged the transfer instrument. As a practical matter, this section alone may be enough to cause most caregivers to give up and not seek to overcome the presumption. This may happen because the caregiver may think, “Litigation is uncertain. If I lose, I will pay all attorneys’ fees and costs and I will receive no funds with which to pay these potentially substantial costs.”
Section 5/4a-30 states that the rebuttable presumption (of section 5/4a-10) does not impose a duty on a financial institution, trust company, trustee or similar entity related to any transfer instrument. This language probably means that, for example, a bank does not have an affirmative duty to take some action simply because a payable on death account is established. The final section of Article IVa is section 5/4a-35 and this section limits the applicability of Public Act 98-1093 to transfer documents executed after the effective date of the Act, which was January 1, 2015.
For those who challenge property transfers to caregivers which take effect at or after the death of the person receiving care, new Article IVa of the Illinois Probate Act is a helpful asset protection tool. However, there are many situations that are not covered by Article IVa. For example, section 5/4a-5(2) excludes most family members from the presumption created by the Article and section 5/4a-5(3) excludes transfers which take effect during the lifetime of the transferor. A significant percentage of such improper transfers are “gifts” which take effect during the lifetime of the transferor and many improper transfers are to family members. If this is the case, then Article IVa will have no impact on many types of improper transfers.
Next time I will discuss some additional potential problems with Article IVa and how a pending Illinois House Bill addresses some of these additional potential problems.
© 2016 Joan E. Emery
On January 1, 2015, Article IVa was added to the Illinois Probate Act by Public Act 98-1093. Article IVa is titled “Presumptively Void Transfers” and contains 7 sections. Article IVa includes the following sections: definitions; a presumption of void transfer; exceptions; effect on the common law; attorney’s fees and costs; a limit regarding the duty of financial institutions and others; and an applicability section. Two of the most important sections of Article IVa are the presumption of void transfer (section 5/4a-10) and the exceptions (section 5/4a-15). In order to fully understand P. A. 98-1093, it is helpful to review some of the legislative history of this Act.
What problems were intended to be prevented by the passage of P. A. 98-1093? It’s very clear that P. A. 98-1093 was intended to protect disabled adults from financial fraud or undue influence by caregivers. Senate Bill 1048 was introduced on January 24, 2013 and it was actually a “shell bill” or “placeholder bill” because it contained one line of text and that line of text did not change anything. Shell or placeholder bills are introduced in order to satisfy the filing deadlines for new bills and the actual text of the bill is added at a later date.
Senate Amendment 001 was introduced on April 4, 2014. This amendment presented the concept of presumptively void transfers and contained 89 lines of text. Senate Amendment 001 modified the Probate Act definition of disabled adult. The existing definition of adult with a disability (section 11a-2 of the Probate Act) includes an adult with mental deterioration, physical incapacity, mental illness, developmental disability, and other specified health issues who is not able to manage his or her person or estate. Senate Amendment 001 broadened the definition of disabled adult to include an adult with mental deterioration, physical incapacity, mental illness, or developmental disability who is not able to manage his or her person or estate or is not able to resist fraud or undue influence. Additionally, Senate Amendment 001 defined “caregiver” very broadly and excluded from that definition only the spouse, and not other family members. Senate Amendment 001 also included a subsection which would have allowed the attorney for the person making the property transfer to certify that he or she had determined that property transfer document was not the product of fraud, duress, or undue influence. Although the text of these three provisions was not included in P. A. 98-1093, these provisions provide some clear guidance as to the original intent of the legislation.
Senate Amendment 002 was introduced on May 6, 2014 and it fine-tuned the original draft of Article IVa. For example, the definition of caregiver was changed to exclude most family members, the attorney certification option was deleted, and the definition of disabled person was deleted.
The final adjustments to Senate Bill 1048 were made by House Amendment 001, which was introduced on May 12, 2014. House Amendment 001 (1) deleted a provision which would have provided broad protection to asset holders such as financial institutions, trust companies and trustees who transferred assets in accordance with a transfer instrument, (2) deleted a provision which prevented the caregiver from overcoming the rebuttable presumption that the transfer was the product of fraud, duress or undue influence solely based on the testimony of that caregiver, (3) added language stating that the provisions of Article IVa were in addition to any other principle or rule of law, and (4) provided that the rebuttable presumption of section 4a-10 did not impose an independent duty on any financial institution, trust company, trustee or similar entity regarding any transfer instrument.
The main focus of P. A. 98-1093 is clearly on caregivers who take financial advantage of disabled adults. Although the some of the original concepts contained in Senate Amendment 001 were later modified by Senate Amendment 002 and House Amendment 001, the fundamental concept of Senate Amendment 001 remained the same – the goal was to prevent caregivers from improperly receiving the assets of adults who were not able to protect themselves from fraud or undue influence by their caregivers.
How does P. A. 98-1093 seek to prevent caregivers from improperly receiving the assets of adults they care for? Next time I will discuss the specific provisions of P. A. 98-1093.
© 2016 Joan E. Emery
There are various “rules of thumb” regarding the amount of assets to be transferred for charitable purposes which justify creating a private foundation. Some advisors recommend that at least $1 million be transferred to the private foundation, some recommend $5 million, and others recommend $10 million. These rules of thumb have evolved because establishing and maintaining a private foundation involves fairly significant expenditures of time and money. The time involved centers around creating the foundation, doing the work necessary to make annual gifts from the foundation, and keeping the foundation current regarding all state and federal administrative requirements. Aside from the actual asset transfers to the foundation, the cost involved revolves around the legal, accounting, and other administrative costs required to keep the foundation current with all state and federal requirements. In addition, if the foundation is terminated, there are additional financial and time costs associated with that termination. In contrast, establishing and maintaining a donor advised fund involves some time and usually minimal additional financial expense (other than the assets donated to the donor advised fund). Additionally, once the assets are transferred to the donor advised fund, the assets become the property of the sponsoring organization and there are generally no termination costs associated with the termination of the donor’s involvement in the donor advised fund.
Additionally, donor advised funds have certain federal income tax advantages which private foundations do not have. Some of the federal income tax advantages of donor advised funds are 1) no excise tax on investment income, 2) a higher percentage deduction for gifts of cash, 3) a higher percentage deduction for gifts of stock or real estate, 4) the fair market value (rather than the cost basis) of certain privately held assets is used to determine the amount of the gift, and 5) no minimum annual distribution requirement. These donor advised fund federal income tax advantages are not enormous, but they are certainly relevant in weighing the merits of each option.
In spite of the reduced administrative costs, the lesser time commitment, and the federal tax advantages of donor advised funds, there are reasons to choose a private foundation instead of a donor advised fund. One of the key reasons to choose a private foundation is the greater involvement the donor can have in the continuing administration of the gift. If the donor is interested in being significantly involved in the administration of the gift, then the greater financial and time costs and some moderate federal tax disadvantages associated with a private foundation may be outweighed by greater degree of involvement the donor has regarding a gift made to a private foundation. Those who administer a private foundation (usually the donor and his or her family) have the maximum amount of involvement and discretion permitted by the Internal Revenue Code in the decisions regarding how, when, whom, and in what amounts distributions for charitable purposes will be made by the foundation. In contrast, when a donor advised fund is created, the donor’s involvement in the specifics of the distributions for charitable purposes is limited to an advisory role. The donor can make recommendations, but the ultimate decisions regarding charitable distributions are in the hands of the sponsoring organization.
Some years ago, a gentleman came to me asking for help to establish a private foundation. When I asked him why he wanted to do so, he stated that he had set up a donor advised fund at a Chicago-based sponsoring organization and when he told the organization that he wanted them to make a contribution which supported stem cell research, the supporting organization told him that they would not make such a donation because the organization did not permit donations which supported stem cell research. Upset and frustrated that the funds he donated would not be used as he requested, the gentlemen made no further donations to the donor advised fund. Instead, he chose to set up a private foundation which could make donations to support stem cell research. His problem probably could have been avoided if he had chosen to have a meeting with a representative of the sponsoring organization before he created the donor advised fund. At that meeting, he could have asked if there were any categories of charitable donations which were outside the mission of the sponsoring organization, but he did not do that. Ultimately, a private foundation gave him the maximum flexibility permitted by law in determining how, when, whom, and in what amounts distributions were made for charitable purposes.
© 2016 Joan E. Emery
A donor advised fund is an account established at a qualified sponsoring organization. A qualified sponsoring organization is a public charity which has satisfied various Internal Revenue Code requirements. The person who establishes the account is referred to as the “donor.” The donor or someone designated by the donor is permitted to make recommendations to the sponsoring organization regarding how, when, whom, and in what amounts distributions to charities will be made from the account by the sponsoring organization. When the donor transfers assets to the donor advised fund, the donor is permitted to take a federal income tax charitable deduction, subject to certain limitations, for the value of each donation. In order for the transfer to the donor advised fund to be deductible, the donor must receive a written acknowledgement at the time of the transfer that sponsoring organization has exclusive control over the transferred assets. There is an exception to the general deductibility rule, discussed in one of my previous blogs, which prohibits a qualified charitable distribution from an individual retirement account to a donor advised fund. A sponsoring organization may administer donor advised funds for hundreds or even thousands of individual donors. The sponsoring organization is required to file reports with the Internal Revenue Service and various state agencies.
A private foundation is an Internal Revenue Code 501(c)(3) (“501(c)(3)”) charitable organization which is not a public charity. Public charities are generally 501(c)(3) charitable organizations which rely on donations from a broad segment of the public or which support such a charitable organization. In contrast, a private foundation usually receives its funding from an individual or a family. Charitable organizations that are exempt from federal income taxes are subject to strict rules under the Internal Revenue Code regarding use of assets, investment limitations, and restrictions or prohibitions regarding certain types of expenditures or activities. If a charitable organization qualifies under the Internal Revenue Code as either a public charity or a private foundation, a person who makes a donation to that organization may take a federal income tax deduction, subject to certain limitations, for that donation. Public charities and private foundations must file reports with the Internal Revenue Service and various state agencies.
For someone who is charitably minded, the simplest way to make a charitable gift is simply to give cash or an appropriate asset directly to the charity. If the amount of the gift is substantial or the donor wishes to continue to be involved in the administration of the gift, an outright gift to the charity may not be a desirable option. In that case, it may be more advantageous for the donor to make a charitable gift to a donor advised fund, a private foundation, or a charitable lead or remainder trust.
In 2014, according to the National Philanthropic Trust website, there were 238,293 donor advised fund accounts with total assets of $70.7 billion and there were 82,045 private foundations with total assets of $695.30 billion. In 2014, although there were many more donor advised fund accounts than there were private foundations, each donor advised fund held an average of $296,694, while each private foundation held an average of $8,474,618.
Next week, I will focus on charitable gifts to donor advised funds as compared to private foundations.
© 2016 Joan E. Emery
Let’s look at some possible beneficiaries and some possible distributions for a Roth Individual Retirement Account (“IRA”). Please note that this discussion assumes that the deceased IRA owner designated the beneficiary in a written beneficiary designation. This discussion focuses on some of the possible federal income tax ramifications and does not discuss the federal estate tax implications.
1. Roth IRA Distribution Options – In order to be a qualified distribution (and thus not subject to federal income taxation), a distribution from a Roth IRA must satisfy the 5 year holding period rule and a “qualifying event” must occur. A key “qualifying event” is the death of the Roth IRA owner. The 5 year holding period rule requires that the distribution not be made before the end of the 5 year holding period which begins with the tax year in which the IRA owner first made a contribution to a Roth IRA. The 5 year holding period ends on the last day of the fifth tax year after the holding period commenced. If the Roth IRA owner dies, his or her holding period carries over to the beneficiary. Upon the IRA owner’s death, after the 5 year holding period is satisfied, a distribution to a beneficiary of the owner’s Roth IRA will be a qualified distribution. The balance of this discussion assumes that the 5 year holding period requirement has been satisfied.
a. Individual Beneficiary
1) Distribution of the Entire IRA Account Balance to the Individual – From an income tax standpoint, taking a distribution of the entire balance in the IRA would negate some of the tax benefits of having a Roth IRA. Since the investment returns accumulate and are distributed free of federal income tax (assuming the distributions are qualified distributions), then taking distributions sooner rather than later reduces the benefit of tax-free investment growth of the funds in the Roth IRA.
2) Spouse is Beneficiary – If the spouse has an unlimited right to withdraw amounts from the deceased owner’s Roth IRA and the spouse is the beneficiary, the spouse has the unique options to (1) rollover the deceased owner’s Roth IRA to his or her own existing Roth IRA or (2) make a special election to treat the deceased owner’s Roth IRA as his or her own Roth IRA. Generally, the spouse elects to treat the deceased owner’s IRA as his or her own IRA by re-designating the IRA account as belonging to the spouse as owner of the account. Additionally, the spouse may be treated as having made the election if certain other requirements are satisfied. The benefit to the surviving spouse of using these options is that there is no required beginning date for Roth IRA distributions during the spouse’s lifetime. These two unique spousal options are often, but not always, the best income tax alternatives for a surviving spouse. To the extent that the surviving spouse is not considered to have adopted one of the above options, he or she will be treated as the beneficiary of an inherited Roth IRA and will have to take minimum required distributions.
3) Individual other than Spouse is Beneficiary - The beneficiary cannot treat the deceased owner’s IRA account as though the beneficiary was the owner of the account. However, the beneficiary can elect to treat the deceased owner’s IRA as an inherited IRA (this is sometimes referred to as a “stretch IRA”).
a) The beneficiary generally must take required minimum distributions starting in the year after the IRA owner’s death. The required minimum distributions are based on the beneficiary’s life expectancy.
b) 5 Year Payout – In a few limited circumstances, the beneficiary could be required to receive the entire account balance by the end of the fifth year following the year of the Roth IRA owner’s death. This is referred to as the “5 year payout rule.” Generally, a 5 year payout rule distribution is not much better, from an income tax standpoint, than the lump sum distribution because the entire IRA must be received by the end of the fifth year following the year of the IRA owner’s death.
b. Trust is Beneficiary –
1) Distribution of the Entire IRA Account Balance to the Trust - See discussion at paragraph 1.a.1), above.
2) A complete explanation of the rules involving a trust as a beneficiary is beyond the scope of this discussion. It is important to note that the trust as beneficiary rules are complicated. If certain requirements are met, minimum required distributions to a trust will be calculated under the favorable “see through trust” rules, which are also sometimes referred to as the “designated beneficiary” rules. With a Roth IRA, the benefit of satisfying the “see through trust” rules is the ability to stretch out the payout of the Roth IRA.
a) If the trust qualifies as a “see through trust,” required minimum distributions must begin by December 31st of the year following the IRA owner’s death.
b) The general rule is that, to the extent that the trust cannot or does not qualify as a “see through trust,” distribution must be made by December 31st of the fifth year after the IRA owner’s death.
c. Estate is Beneficiary –
1) Distribution of the entire IRA Account Balance to the Estate – See discussion at paragraph 1.a.1), above.
2) The general rule is distribution must be made by December 31st of the fifth year after the IRA owner's death. d. Qualified Charity is Beneficiary – From an income tax standpoint, naming a qualified charity as beneficiary would not be a good choice because there would be no income tax benefit to naming a tax-exempt qualified charity as beneficiary of a Roth IRA.
e. Distribution as a Result of a Disclaimer – is beyond the scope of this discussion.
2. Caveat: It is important to consult with your tax advisor before taking any action, so that your tax advisor can determine how these general rules impact your specific situation, especially because these general rules involve numerous particular requirements, special circumstances, and unique exceptions.
I am an attorney practicing in the Chicago area.