West Coast Forum 2023 | Key Takeaways

THE HERE & NOW: CURRENT DEVELOPMENTS IMPACTING ULTRA-HIGH-NET-WORTH FAMILIES & FAMILY OFFICES

Partners Katy Crafton Fluet and Nicole M. Pearl highlighted recent developments on a wide range of legal issues potentially relevant for family offices.

1. Estate tax deduction regulations: Newly proposed regulations under Internal Revenue Code (IRC) Section 2053 offer guidance on estate tax deductions relating to future expenses and claims, Graegin loan interest and amount paid pursuant to personal guaranty.
2. Valuing cryptocurrency: Chief Counsel Advice Memorandum 202302012 confirmed that cryptocurrency is not a security, and a qualified appraisal is required to claim a charitable deduction under IRC Section 170. Similarly, Chief Counsel Advice Memorandum 202302011 confirmed that cryptocurrency is not a security eligible for a loss deduction under IRC Section 165(g).
3. CA directed trust statute: California recently enacted a directed trust statute (Cal. Prob. Code Section 16600), which will go into effect on January 1, 2024.
4. No basis step up for irrevocable grantor trusts: Rev. Rul. 2023-2 confirmed that assets held in an irrevocable grantor trust at the time of a decedent’s death which are not included in the decedent’s gross estate will not receive a basis step-up by reason of the decedent’s death.
5. Merger impact on stock valuation: In Baty v. Commissioner, the government conceded that merger negotiations should not be considered in valuing contribution of publicly traded stock to a grantor-retained annuity trust.
6. Defined value clauses: The Tax Court’s decision in Sorenson v. Commissioner offers valuable lessons in the planning and administration of transfers involving defined-value clauses.
7. Greenbook proposals: Various proposals included in the US Department of the Treasury’s 2024 “Greenbook,” while unlikely to become law prior to the 2024 election, indicate areas of interest to the current administration. Notable proposals address valuation discounts, limitations on the benefits of generation-skipping transfer tax exemption, restrictions on certain annuity trusts and distributions from private foundations to donor-advised funds (DAFs).

SUCCESSION – THE SEQUEL: DEALING WITH THE AFTERMATH OF DYSFUNCTIONAL FAMILY RELATIONSHIPS

During this session, Partners Robert Barton and Laurelle M. Gutierrez addressed how family dynamics, pre-death conflicts and post-death conflicts lead to legal battles that may be mitigated and/or avoided by communication in the planning phase. The panelists identified a variety of situations that lend themselves to legal disputes in order to assist clients with their estate planning and end-of-life considerations.

1. Family dynamics: Disputes often arise from dysfunctional family relationships, miscommunications, cognitive or physical deterioration of a relative, geographic isolation or abandonment, personality issues, miscommunications and marital disputes.
2. Pre-death conflicts: Undue influence is a common type of litigation/controversy that arises when someone in a position of power or authority coerces or pressures an individual to make or change a will/trust. Elder abuse is another common type of litigation/controversy, usually arising from the physical, mental or financial abuse by a care custodian on an elderly individual. Importantly, this claim does not require malicious intent. Standing by a beneficiary to contest a will/trust arises as soon as the trustor becomes incompetent, and the trustee now is required to inform the beneficiaries of the incompetency and to provide a copy of the will/trust to the beneficiaries.
3. Post-death conflicts: Will/trust contests often occur after death by upset family members with unmet expectations. Importantly, “no contest” causes don’t always save the plan. Intentional interference with expected inheritance is a tort claim that can be brought if a will or trust contest cannot be successfully brought. Breach of fiduciary duty is a claim that can be brought against a trustee for failure to conform with multiple duties including, but not limited to, loyalty, impartiality and disclosure.
4. Avoiding the battles: Communicate your estate plans, assets and trusts every year, if not more frequently, to your loved ones and intended beneficiaries to avoid potential legal battles. It helps to address the equal, not equitable, division of assets and control. Tools to assist avoiding legal battles include negotiated estate plans and the use of entities that manage inherited property independently of family, such as corporate fiduciaries or family offices/private trust companies.

LABOR LAW & PRIVACY: TOP FIVE STRATEGIES FOR MANAGING WORKFORCE RISK

Employment Partners Christopher A. Braham and Christopher Foster discussed navigating employment law and privacy issues for family offices. They explored proper worker classification, structuring employing entities and relationships to mitigate and control risk, strategies to ensure worker confidentiality, proactive communication, and conflict resolution tools and techniques.

1. Classifying workers: When classifying workers as employees or independent contractors, the best practice is to generally presume workers should be employees with limited exceptions. This helps to minimize the risk for potential liability, penalties, audits and negative unwanted publicity from a misclassification claim.
2. Liability exposure: To manage and reduce exposure for liability, it is important to clearly designate and structure the employing entity and relationships to service recipients.
3. Applicant/employee evaluation: During evaluation of an applicant/employee, best practices include checking references, conducting background checks, and ensuring compliance with federal and state background check and antidiscrimination laws.
4. Confidentiality: Confidentiality is critical from hire to separation. Develop a tailored strategy for confidentiality agreements, policies and practices and managing separations.
5. Managing claims: To manage employees effectively and reduce the likelihood of claims, and to reserve defense in the event of a claim, it is critical to provide (and document) candid performance assessments.
6. Resolving conflict: Strongly consider use of arbitration and dispute resolution agreements and terms to help resolve conflicts and protect confidentiality.

MEGA DONORS: PLANNING FOR MULTIMILLION DOLLAR CHARITABLE GIFTS

During this session, Partners Elizabeth R. Glasgow and Kathryn C. Gose discussed recent trends in philanthropy, highlighting one high-profile donor’s method of “trust-based philanthropy.” The panelists also discussed their guiding principle in advising on charitable giving: Clients should apply the same scrutiny and attention to detail brought to for-profit transactions to their philanthropic gifts.

1. Donor due diligence: Public charities remain an attractive option for mega gifts, but large public charities are increasingly subjecting potential donors to rigorous vetting processes before accepting large gifts.
2. DAF caution: DAFs remain a flexible charitable vehicle for gifts; yet, as the 2021 Fairbairn case demonstrates, DAF flexibility has limits. DAF donors must be prepared to relinquish ultimate control of the donated assets.
3. Gift agreements: Gift agreements should be as carefully and thoroughly negotiated as any for-profit transaction. Mega donors wanting to make restricted gifts should carefully consider the scope of the restriction, benchmarks, contingencies and enforcement mechanisms.
4. Remember, remember the disqualified person: The identity of “disqualified persons” can change over time. When funding private foundations and other vehicles potentially subject to excise taxes, donors need to keep track of ongoing risks. Remain on guard!
5. Gifting with business interests: Charitable vehicles face practical and tax obstacles when holding business interests. Planning for the donation of a business interest should include planning for its disposition by the charity.

CTA, FINCEN & FBARS, OH MY!

Partners Daniel J. Bell and Chris Nason discussed the existing foreign reporting requirements and the newly passed Corporate Transparency Act. They reviewed best practices on reporting, ongoing compliance, and consequences for failure to file and disclosure.

1. Foreign reporting requirements: There are numerous existing reporting requirements applicable to individuals and entities which own foreign assets, receive gifts from foreign people or have interactions with foreign trusts. While some reporting obligations can be easily determined, there are some that require in-depth analysis. Maintaining awareness of reporting triggers and thresholds is important in helping individuals and entities stay apprised of changes that could subject them to reporting from year to year.
2. Information disclosure: The Corporate Transparency Act imposes a new reporting requirement effective January 1, 2024. This reporting requires disclosure of information about entities organized or doing business in the US, their beneficial owners and controlling persons. Reporting will be due as soon as within 90 days of entity formation for entities created in 2024. The system and mechanism for e-filing are still under development.
3. Reducing exposure: Individuals and entities should take the time now to understand new or existing reporting requirements. Doing so will help ensure that reporting is completed in a timely manner.